IRS Provides Guidance on Payroll Tax Executive Order
In early August, President Trump issued an executive order directing the Secretary of the Treasury to exercise his authority under an emergency declaration to defer the withholding, deposit, and payment of certain payroll taxes.
Under normal circumstances, employers and employees each pay half of the 12.4% Social Security taxes due per worker. Under the executive order, the 6.2% employee portion could be deferred from September 1, 2020 through December 31, 2020. More specifically, the employee portion of the tax would not be withheld by employers for any employee who is paid less than $4,000 before taxes under a bi-weekly pay period. If the employee’s wages are eligible for the deferral, employers would still withhold and pay their 6.2% of such taxes, but the 6.2% employee portion would not be collected.
The IRS issued Notice 2020-65 to provide further guidance regarding the deferral of payroll taxes and employer-related obligations. The first thing to note is that employers are not obligated to defer the payment of the employee portion of the taxes. An employer may choose to continue to withhold and deposit the employee portion of the taxes as they would under normal circumstances.
If an employer elects to defer withholding the employee portion of the taxes from September 1, 2020 through December 31, 2020, the employer is required to withhold and deposit those taxes at the beginning of 2021. More specifically, the guidance provides that from January 1, 2021 through April 30, 2021, the employer must ratably deduct the deferred taxes from the wages paid to the employee and pay such amounts to the IRS.
If the employer fails to deduct such amounts from the employee’s paycheck at the beginning of 2021, the employer will face penalties and interest. The penalties and interest will begin to accrue on May 1, 2021.
Notice 2020-65 does not provide specific guidance on what should happen in the event an employee is no longer with the company in 2021. It also doesn’t address what action the employer should take if the increased withholding amount exceeds an employee’s wage amount in the first part of 2021. The only guidance provided states that an employer “may make arrangements to otherwise collect the total applicable taxes from the employee.” It is unclear what this means or how it would be applied.
Pros and Cons of Payroll Tax Deferral
The main goal of the executive order is to provide households with more money during a time when the economy is being negatively impacted by the COVID-19 pandemic and unemployment rates are high. This approach allows the Executive Branch to provide immediate relief to families who are struggling financially instead of waiting for Congress to take action through a stimulus bill.
The main concern with this approach is that it’s only a deferral and not a permanent tax holiday (it would require Congressional approval and action to permanently forgive the deferred payroll taxes, which is unlikely). While workers will see a higher paycheck in the short term, once 2021 rolls around employees will be expected to pay such amounts back to the government and many households may have an issue with wherewithal to pay. The secondary issue is what responsibility the employer will bear with respect to making the appropriate adjustments in 2021 and remitting such amounts to the IRS without incurring penalties and interest. Without additional relief provided by Congress, both employees and employers could face significant challenges in 2021 with respect to the payroll taxes deferred in 2020.
The content contained in this article is for information purposes only and not tax advice. You should consult a tax advisor for advice applicable to your situation.
Tara Fisher has been practicing international tax for 20 years. Her professional background includes working for the US Congress Joint Committee on Taxation, and the national tax practice of PWC, the University of Pittsburgh, and American University in Washington, DC. She is a licensed CPA and holds both an undergraduate and graduate degree in accounting from the University of Virginia.