Payroll Tax Deferral Next Steps
Earlier this week we sent an update regarding the Employee Social Security Tax Deferral. You can find a link to this notice here. Below we are including an updated FAQ for employers regarding the Payroll Tax Deferral. Additionally, we know that some of you may be fielding questions from your employees. We want to assist you with providing accurate and clear information to employees. As such, we have provided an FAQ that you may use to assist with communicating with your own employees.
Employer Frequently Asked Questions
What payroll taxes may be deferred?
The deferral applies to the 6.2% employee portion of social security tax. The taxes may be deferred for the period beginning on September 1, 2020 and ending December 31, 2020.
Are there any limitations on the deferral?
Only employees who receive wages and compensation below $4,000 in a given bi-weekly payroll period or an equivalent amount for other payroll periods may be allowed to defer these taxes. This represents an annualized pay of $104,000 which translates to the following per pay period limits for the below payroll frequencies:
Biweekly- $4,000 per payroll
Semi-monthly- $4,333 per payroll
Weekly- $2,000 per payroll
How and when are the deferred taxes to be paid?
The due date to remit the deferred taxes is postponed until the period beginning January 1, 2021 and ending April 30, 2021. The IRS notice states that employers are to withhold and pay any deferred payroll taxes “ratably” from employee wages and compensation paid from January 1, 2021 through April 30, 2021. Interest, penalties, and additions to the taxes will begin to accrue on May 1, 2021 with respect to any unpaid taxes. We are awaiting further IRS guidance as to how employers are to “ratably” withhold and pay the deferred payroll taxes.
Is this Voluntary for Employers?
There was nothing in the IRS notice requiring that employers participate in this payroll tax deferral. The IRS has further clarified in a statement on a September 3rd teleconference that “Employers may, but are not required to, utilize the relief.” https://news.bloombergtax.com/daily-tax-report/irs-confirms-employee-payroll-tax-deferral-is-optional
What are the risks to employers who choose to implement this?
Employers remain responsible for the payment of the taxes beginning January 1, 2021. All unpaid or deferred taxes must be paid to the IRS by April 30, 2021. The IRS has not provided detailed guidance regarding how the unpaid/deferred taxes should be collected by Employers and paid in 2021. They have only stated the employer must withhold and pay the tax “ratably” from wages and compensation paid between January 1, 2021 and April 30, 2021. The IRS has also not provided guidance regarding situations where an employee has terminated employment, has a leave of absence or has insufficient wages to pay back any unpaid balances due. For terminated employees, employers could deduct the remaining balance from their last paycheck. However, state laws differ as to how to collect unpaid debts from terminated employees. If an employee is unable to pay back the amounts for any reason, the employer would be responsible. If the employer does not pay back the unpaid balance by April 30, 2021, there is nothing in IRS Notice 2020-65 that provides relief to an employer if there are circumstances that prevent the employer from doing so.
What are our options if we want to participate?
Because of the additional risk and liability placed on employers and the lack of any guidance as to the outstanding questions noted above, we do not anticipate that many employers will choose to implement this program immediately. The isolved development team is working on some additional options to further automate the deferral process which we will communicate as soon as they are available. In the meantime, if you choose to implement the deferral despite the lack of additional guidance from the IRS, please contact your payroll representative via email to notify us that you wish to participate.
What do I tell my employees?
While we do recommend communicating directly with your employees regarding this matter, we have also created an employee FAQ sheet similar to this one for you to share with them. You can find this document here.