IRS Issues Guidance on Payroll Tax Deferrals, but Questions Remain — UPDATED
Article updated 9/1/2020
Following recent comments made by Secretary of Treasury Steven Mnuchin regarding the permissive nature of the IRS’s published guidance relating to deferral of certain payroll taxes, the following article has been updated to clarify that the deferral of payroll taxes by employers is not mandatory under the guidance and whether it is advisable for an employer to elect to defer payroll taxes is a determination that should be made by each employer by taking into account its own circumstances and employment objectives.
Late Friday, August 28, the IRS issued highly anticipated guidance on the payroll tax deferral ordered by President Trump in an August 8 Executive Order. The guidance, published in IRS Notice 2020-65, postpones the due date for withholding and payment of an employee’s portion of FICA taxes (6.2%). Despite hopes that the IRS would eliminate the payroll tax burden for the period beginning September 1, 2020, through December 31, 2020, the IRS’s guidance instead confirms that the obligation to withhold and pay the payroll tax is only deferred to 2021. A complete forgiveness of the payroll tax obligation would have to come from Congress.
As background, President Trump issued an Executive Order on August 8 directing the IRS to defer withholding and payment of the employee’s share of FICA taxes (6.2%) for wages paid between September 1, 2020, and December 31, 2020.
Who is impacted?
All employers obligated to withhold FICA taxes from wages are subject to the deferral.
The deferral only applies to employees whose bi-weekly wages do not exceed $4,000 before tax. The IRS guidance clarifies that the determination of whether an employee’s wages exceed $4,000 must be made on a pay period-by-pay period basis. So it is possible that an employee could be subject to FICA tax withholding in one pay period but not in the next.
How does the deferral work?
Employers that elect to take advantage of the deferral must defer withholding of the total applicable FICA taxes from September 1, 2020, through December 31, 2020. Then from January 1, 2021, through April 30, 2021, employers must withhold and pay back the deferred taxes by ratably withholding the amounts from affected employees’ wages. Employers who fail to withhold and pay the deferred taxes by April 30, 2021, will be subject to interest, penalties, and additions to tax beginning May 1, 2021.
The IRS guidance makes clear that the payroll tax obligation is only deferred to 2021, and not forgiven. But what if an employee whose payroll taxes were deferred in late 2020 terminates employment? What if the employee does not make enough money in early 2021 to ratably pay back the deferred taxes? The IRS Notice does not address what happens in these circumstances, but it would seem that the obligation to make the payments will fall on the employer. The IRS does explain that an employer may make arrangements with employees to collect the deferred taxes, but does not offer any detail on how to do so.
Is the deferral required?
While neither the Executive Order nor the IRS Notice indicate whether employers may opt out of the payroll tax deferral, statements from Treasury Secretary Mnuchin make clear that the decision to defer the payroll taxes (or not) is left to employers. In making this decision, employers should weigh the risks and potential benefits of deferring the payroll taxes, along with the employer’s individual circumstances.