Late on Friday, August 28, 2020, the IRS issued Notice 2020-65 providing highly anticipated guidance addressing the Presidential Executive Order regarding the deferral of certain payroll tax obligations. Unfortunately, the notice failed to address the most basic issues raised by the Executive Order. Today we will discuss what we know, what questions remain, and practical considerations for employers. Implementation of the deferral begins September 1, 2020 – yes, tomorrow.
On August 8, 2020, the President issued an Executive Order via a memorandum to the Secretary of the Treasury directing him to use his authority to postpone the collection of tax during national disasters to allow certain taxpayers, who earn less than $4,000 on a bi-weekly basis (more on that later), to defer the 6.2% employee portion of Social Security payroll taxes for the period September 1, 2020 through December 31, 2020. Previously, the CARES Act provided a separate and distinct deferral for employers to pay the employer portion of Social Security taxes for the period March 27, 2020 through December 31, 2020.
While this new deferral discussed in Notice 2020-65 relates to the employee share of Social Security taxes, it is employers who must implement the deferral as the employer is required to withhold the tax from wages and remit it to the IRS no less than quarterly.
What We Know
- The power to defer taxes during a national disaster granted under IRC Section 7508A is just that, a deferral. This is NOT a payroll tax cut. Only Congress can provide that. However, Congress has signaled it has no appetite for such a cut. Mainly because such cuts: 1) do not aid the unemployed; 2) do not aid retirees; and 3) provide a small economic benefit to employees compared to the administrative cost burden they create for employers.
- Employers may, but are not required, to utilize the relief.
- Though this cannot be found in written IRS guidance, an attorney with the IRS, indicated this during the agency’s monthly payroll industry teleconference.
- Any taxes deferred during the deferral period, September 1, 2020 – December 31, 2020, must be repaid ratably between January 1, 2021 and April 30, 2021. Generally, this creates a rolling 4-month deferral, assuming income is earned ratably over the deferral period.
- Employers will be subject to penalties and interest if the deferred taxes are not paid by April 30, 2021.
- If an employer continues to withhold taxes during the deferral period, they must remit all taxes withheld according to their normal remittance obligation due dates. An employer cannot use this as an opportunity to create a short-term loan.
- Whether/not an employee qualifies for the payroll tax deferral must be made each pay period. Any employee that earns wages during any bi-weekly pay period of $4,000 or more, does not qualify for a deferral during that pay period. Below is a chart converting the bi-weekly pay period threshold referenced in the notice to other common pay periods used by employers.
- Note: Since this determination is done by the employer, an employee who earns $2,500 bi-weekly from two employers, could defer payroll taxes despite their exceeding the established threshold.
- How should an employer document their employees’ election regarding the payroll tax deferral?
- How can/will an employer recoup taxes from an employee who is no longer in their employ or does not earn enough wages to cover the deferred taxes during the January 1, 2021 and April 30, 2021 payment period?
- The notice indicates “If necessary, the [employer] may make arrangements to otherwise collect the [deferred payroll taxes] from the employee.” How to collect from your employee is left silent!
- How should employers report the deferral, if applicable to the IRS? Will this be an aggregate by employer reporting, or will employers need to provide details by employee?
- It seems obvious another revision to Form 941 will be required for Q4 2020 and Q1 2021 to deal with this matter.
- If an employer continues to withhold the deferrable payroll taxes and Congress later provides legislation making the deferral a tax cut, how will this be reconciled?
- A simple answer would be on 2020 Form 1040; however, the IRS has released the first drafts of this form. Changes would most likely delay the beginning of the 2020 tax filing season while the IRS, and tax software providers, scramble to address the needed change in the forms and related instructions. Further, even if the deferral stays a deferral, tax software providers will likely need to reprogram their software to deal with 2020 Form W2s that may otherwise create a payroll tax under withholding error/diagnostic.
- Employers should consult their employment attorney and payroll processing provider for advice on how to deal with the legal and practical issues this payroll tax deferral creates.
- Employee education is critical. Employees should be advised in writing this payroll tax deferral is not a payroll tax cut, and they will be liable to pay the amounts deferred ratably between January 1, 2021 and April 30, 2021.
- Consider a written employee election or acknowledgement of payroll tax deferral and repayment:
- Consider a clause indicating how the employer plans to recoup the deferred taxes should the employee cease employment before April 30, 2021, e.g. mandatory withholding from their final paycheck.
- Consider a clause indicating how an employer will collect the deferred taxes if the employee’s wages are not adequate to cover repayment before April 30, 2021, i.e. how an employee will pay the employer.
Below is a chart indicating the total tax deferral available for employees who earn a quarter, half or the maximum threshold of wages that qualify for the payroll tax deferral. Given the small likelihood of significant economic recovery before April 30, 2021, and the dire economic situation of so many in our country including employers, is this effort worth the result? From an employee education perspective, are the incremental increase in wages from September to December worth paying double the Social Security taxes from January to April?
If you need help implementing the payroll tax deferral, call on us. Meanwhile, continue to visit our COVID-19 Tax Resource Center for up-to-date information on how the COVID-19 pandemic may affect your tax filing, payments, and planning.