September 2, 2020
The Treasury Department issued its official guidance on the 2020 payroll tax relief that President Trump put into action on August 8 in his Presidential Memorandum. According to IRS Notice 2020-65, payroll tax relief is available for employers and is applicable to wages paid from September 1, 2020, through December 31, 2020.
Employers can defer withholding, deposit, and payment of the employee's portion of Social Security tax on wages that are less than $4,000 during a bi-weekly pay period. Each pay period is to be considered separately, and no deferral is allowed for any payment to an employee of taxable wages of $4,000 or more for a bi-weekly pay period. Technically the requirement to deposit employee Social Security tax does not occur until the tax is withheld. By postponing the withholding of the employee Social Security tax, the deposit obligation is delayed. The choice to defer withholding, deposit, and payment of the Social Security taxes is optional.
This is a deferral of the payroll tax and not an exemption from payroll tax. The due date for deferred employee Social Security taxes is postponed until the tax period beginning on January 1, 2021, and ending on April 30, 2021. Deferred payroll taxes not paid during this period will be subject to interest and penalties.
"We're working on systems and how this will be orchestrated," said Pete Isberg, vice president of government affairs for ADP. "There are some questions about how to offer this to employees, how employees should elect whether they want this deferral or not. We know that it is optional for employers, although it is pretty clear employees will have an opinion about this. It is pretty hard for an employer to implement this deferral without an employee-by-employee conversation. Do we default people in? Do we default people out? This guidance applies to 100 million people! There's a lot of work to be done really which wasn’t apparent looking at the IRS Notice."
President Trump's Executive Order includes a suggestion that the Secretary of Treasury "shall explore avenues, including legislation, to eliminate the obligation to pay the taxes deferred pursuant to the implementation of this memorandum." Certain members of Congress, however, have balked at the idea. Last week, 143 House Democrats publicly denounced the deferral program in a letter to the President and demanded that President Trump reverse the executive action, so the likelihood of a forgiveness program coming out of Congress seems slim.
For employers who plan on implementing the payroll tax deferral program, here are some suggestions to make the process easier and to protect all involved parties:
- Make sure you inform employees that it is expected that deferred Social Security taxes will have to be paid back between January 1 and April 30, 2021.
- Have employees sign a contract agreeing to additional withholding up to twice the normal amount of Social Security taxes in the period from January 1 through April 30, 2021.
- Include in the employee contract the agreement that the employee will reimburse the employer for any deferred payroll taxes should the employee leave the company prior to such a time when all deferred payroll taxes have been repaid.
- Have a plan in place to account for repayment of deferred payroll taxes should the affected employee be earning less in 2021 than he or she earned in 2020.
- Make sure your payroll team or payroll provider understands its obligations for adjusting paychecks to reflect the deferral and then, next year, adjusting paychecks to repay the deferred amount.
There are still unanswered questions that need to be addressed. These include, but are not limited to:
- What if an employee leaves the company before the deferred tax is collected?
- If the employer pays payroll taxes on behalf of the employee, will it be considered as taxable income for the employee?
- If an employer chooses not to defer payroll taxes, could there be legal ramifications?
- Could an employer incur penalties if they cannot pay the deferred tax?
Feel free to contact any member of our team at (610) 828-1900 (PA) or (732) 341-3893 (NJ) with questions. Rich Higgins, CPA, managing principal – New Jersey office can be contacted at [email protected]. I can be reached at [email protected]. As always, we are happy to help.
Stay safe,
Marty McCarthy, CPA, CCIFP
Managing Partner
McCarthy & Company
Source: IRS Issues Guidance on Payroll Tax Deferral. Gail Perry. CPA Practice Adviser. August 29, 2020
Disclaimer: This alert is for informational purposes only and does not constitute professional advice. Information contained in this communication is not intended or written to be used as tax advice, and cannot be used by the recipient to avoid penalties that may be imposed under the Internal Revenue Code. We strongly advise you to seek professional assistance with respect to your specific issue(s).
