Late on Friday August 28, 2020 the IRS and the Department of Treasury issued long-awaited guidance on the payroll tax deferral that was issued by President Trump in a memorandum on August 8, 2020. The IRS notice (Notice 2020-65) states the following:
- Allows employers to postpone the withholding, deposit, and payment of the employee portion of Social Security Tax under Sec. 3101(a) and Sec. 3201 (The Railroad Retirement Act).
- The deferral can be applied to gross wages or compensation paid to an employee on a pay date during the period beginning on or after September 1, 2020 and ending on December 31, 2020
- The deferral may only be applied to wages or compensation paid in a bi-weekly pay-period that is less than $4,000, or the equivalent threshold amount for other pay-periods. The threshold is applied on a per pay-period basis meaning that an employee’s wages would not qualify for one pay-period if his/her bi-weekly pay is more than $4,000 but his/her wages will qualify for a subsequent bi-weekly pay-period if the employee’s pay does not exceed the $4,000 threshold.
- The employer must begin withholding and paying any deferred taxes ratably from wages paid beginning on January 1, 2021 and ending April 30, 2021
- Interest and penalties will begin to accrue on unpaid taxes beginning on May 1, 2021.
- The notice states that “if necessary [an employer] may make arrangements to otherwise collect the total [unpaid taxes] from the employee” but it does not provide any guidance as to how the employer should go about attempting to collect the deferred taxes from the employee.
The notice makes clear that the employer is responsible for collecting and remitting any deferred employee social security tax. Unfortunately, the notice provides little direction to employers or payroll providers as to how this should be handled. For employees who continue to remain employed by the employer in 2021, the employer could essentially “double up” the tax collection for employees from January through April of 2021 to pay back the deferred taxes, but what about employees who leave before the end of 2020? May an employer deduct the total uncollected tax from the employees’ last paycheck? What if an employer chooses not to participate in the tax deferral but an employee subsequently requests it? Is the employer obligated to comply with the employee’s request? We will continue to monitor for additional guidance from the IRS and Department of Treasury to answer these and other outstanding questions.
In the meantime, the isolved product development team is collaborating to discuss this additional but limited IRS guidance to determine the best methods to assist clients with the tracking of any elected employee deferrals. We will continue to update you with additional information as soon as it is available.