IRS Update: Payroll Tax Deferral

On Aug. 8, 2020, President Trump issued a Presidential Memorandum to defer the withholding, deposit, and payment of certain payroll tax obligations.  The Memorandum directed the Secretary of the Treasury to defer the withholding on wages for the period Sept. 1, 2020 to Dec. 31, 2020 subject to two conditions:

1. Deferral applies to employees earning wages of $4,000 or less during a bi-weekly pay period, or equivalent amounts for other pay periods and
2. Amounts deferred are not subject to any penalties, interest, or addition to the tax.

In addition, the Memorandum said the Secretary of the Treasury shall explore avenues, including legislation, to eliminate the obligation to pay the taxes deferred.  As directed by the Memorandum, the Internal Revenue Service issued Notice 2020-65 (IRS Notice) on Aug. 28, 2020.

On Sept. 3 the IRS confirmed the payroll tax deferral is optional. “Employers may, but are not required, to utilize the relief,” Kelly Morrison-Lee, an attorney with the Internal Revenue Service, said during the agency’s monthly payroll industry teleconference. This clears up any uncertainties that were presented after the Presidential Memorandum was released.

Payroll Tax Deferral Details 

The IRS Notice said employers that are required to withhold and pay the employee share of social security tax (Affected Taxes) are affected by the COVID-19 emergency for purposes of the Memorandum and the IRS Notice (Affected Taxpayers).  For such Affected Taxpayers, the due date for withholding and payment of employee Social Security taxes on Applicable Wages is postponed until the period beginning Jan. 1, 2021 and ending on April 30, 2021. Applicable Wages are defined as wages or compensation paid on a pay date beginning on Sept. 1, 2020 and ending on Dec. 31, 2020, but only if the bi-weekly pay is less than $4,000 or an equivalent amount of other pay periods. The determination of Applicable Wages is made on a pay-period by pay-period basis.  Thus, an employee may be subject to deferral in one pay period and not another.

An Affected Taxpayer must withhold and pay the total Applicable Taxes deferred between Jan. 1, 2021 and April 30, 2021 or interest, penalties, and additions to tax will begin to accrue.  If necessary, the Affected Taxpayers may make arrangements to collect the total Applicable Taxes from the employee.

Before the guidance, the US Chamber of Commerce said many companies will likely continue to withhold payroll taxes because it would create a large tax bill for employees. The IRS Notice leaves some questions unanswered including what employers should do if employees quit before the end of the year.

Please consider this carefully, at the present time this is a deferral only. Amounts you do not withhold from an employee paycheck from Sept. 1, 2020 to Dec. 31, 2020, will result in these amounts being withheld along with normal payroll taxes and being remitted from Jan. 1, 2021 to April 30, 2021.

For further information regarding the payroll tax deferral or any other tax concerns, contact one of our tax advisors.