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IRS Issues Guidance on Payroll Tax Holiday

September 03, 2020

New guidance on payroll tax deferral has been released, employers. Here are the details.

Attention employers…you’ll want to read up on recent IRS guidance concerning payroll tax deferral. On August 28, 2020, the IRS and Secretary of the Treasury issued Notice 2020-65 related to the Executive Order titled “Memorandum on Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster”. The Notice and related guidance does not apply to the employer’s share of the payroll taxes deferred under the CARES Act.

What is the payroll tax deferral?

The Order from President Trump directs the Secretary of the Treasury to permit deferral of employee Old Age Survivors and Disability (“OASDI”) taxes for eligible employees. It should be noted that neither the Order from the President nor this Notice require an employer to defer the payment of employee OASDI taxes, the deferral is purely voluntary.

This notice clarifies that employers and self-employed individuals will be required to pay 100% of the deferred amounts by April 30, 2021. There is no mention of how employers will do this, only that the employer must “ratably” deduct any deferred employee OASDI from the wages paid to the employee during the period from January 1 through April 30.

More about the payroll tax suspension period

According to IRS Notice 2020-65, the payroll tax suspension period or holiday runs from September 1 through December 31, 2020. It applies to employees whose wages are less than $4,000 per bi-weekly pay period. Note that this also includes salaried workers who earn less than $104,000 annually. This notice clarifies that this limitation is separately determined for each employee in each payroll period.

Other Concerns

What this notice does not address is what an employer should do if the employee terminates employment, has a leave of absence, or otherwise does not have sufficient wages in 2021 to repay the deferred amount. The notice indicates that employers “may make arrangements to otherwise collect the total applicable taxes from the employee” while offering no further guidance.

There are a couple other legal concerns that the notice does not address. The Internal Revenue Code obligates an employer to withhold an employee’s social security taxes, failure to do so could result in a penalty. On top of that, an employer could be liable for taxes that are withheld but not paid to the IRS. In this case, an individual (i.e. a CFO) could be held personally liable for these taxes.

What are the penalties for late payments?

Beginning May 1, 2021, the IRS will impose interest, penalties and additional taxes for employers who fail to withhold and deposit the deferred payroll taxes by April 30, 2021.

Does Notice 2020-65 change the amount owed?

This executive order and this Notice are very clear confirming the deferral of tax, it does not change how much tax employees and employers owe. This can only be modified by Congress.

Should you participate?

My two cents: There are a lot of unanswered questions when it comes to the payroll deferral period and potential employer liability attached to it. Remember, though you do get this payroll tax deferred between now and the end of the year, you have to turn around and pay it back between January and April. For a lot of employers, this could be a lot of work and a lot of risk for such a short benefit.

Questions on your tax obligations? Contact Jade or any member of our Tax Services Team.

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