IRS Guidance on Payroll Tax Deferment

The Internal Revenue Service recently issued guidance on President Trump’s August 8, 2020, executive order, which deferred the withholding and payment of the employee’s portion of Social Security taxes. The very limited guidance arrived late Friday, August 28, 2020, just in time for the start of the period eligible for deferral, which begins Tuesday, September 1, 2020, and ends December 31, 2020.

Items clarified in the guidance:

• For affected taxpayers (employers), Social Security tax payments are postponed until the period beginning on January 1, 2021, and ending on April 30, 2021. The deferral does not apply to the Medicare tax withholding.

• The deferment is applicable to wages paid to an employee on a pay date during the period beginning on September 1, 2020, and ending on December 31, 2020, but only if the earnings for a bi-weekly pay period are less than the threshold amount of $4,000, or the equivalent threshold amount with respect to other pay periods.

• Deferment qualification is determined on a pay period-by-pay period basis. The relief applies to wages or compensation paid to an employee for each pay period in which the compensation is less than the $4,000 bi-weekly payment threshold, regardless of the amount paid to the employee during other pay periods.

• Affected taxpayers (employers) must withhold and pay the deferred taxes no later than April 30, 2021, in order to avoid interest, penalties, and additions to tax.

• The responsibility to remit the deferred taxes after December 31, 2020, remains with the employer.

Many questions still remain:

• The official guidance does not address whether the deferment of employee Social Security tax is optional or mandatory; however, it appears that the intent is for it to be optional. U.S. Treasury Secretary Steven Mnuchin has verbally confirmed that the deferment is not mandatory, but this is not specifically addressed in the executive order or recent official IRS guidance.

• If an employee leaves the employer prior to having the deferred taxes withheld from his or her pay or does not have enough post-December 31, 2020, earnings to cover the deferred tax, there is no specific guidance on how an employer covers the unpaid taxes. Friday’s guidance simply indicates that the employer may make arrangements to otherwise collect the total taxes from the employee.

Taxpayers can view the guidance in IRS Notice 2020-65. If you have questions concerning eligibility for deferral of payroll taxes, contact a Hantzmon Wiebel team member. We are here for all your tax, accounting, and advisory needs.

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