Payroll Tax Holiday/Deferral
September 3, 2020 |
On Friday, August 28, the IRS and Treasury Department released guidance (Notice 2020-65) on the employee payroll tax deferral as directed by President Trump’s August 8 memorandum. While the notice provides some general guidance for employers, it omits detailed implementation guidance requested by employers and the professional community since the memorandum’s release.
IRS Notice 2020-65 provides an option for employers to defer collection and payment of the employee portion of social security tax (6.2%) on eligible wages for the period September 1, 2020 to December 31, 2020. Eligible wages are compensation paid for a biweekly pay period less than the threshold amount of $4,000, or the equivalent threshold amount with respect to other pay periods, determined on a per-pay basis. Employers must collect and remit the employee portion of the social security taxes not withheld on wages earned from September 1, 2020 to December 31, 2020 from employees’ wages paid from January 1, 2021 to April 30, 2021. Interest, penalties, and additions to tax will begin to accrue on May 1, 2021 with respect to any unpaid taxes.
We recommend that employers do not participate in this program due to the administrative complexity involved, coupled with the likelihood that employees will not fully understand the implications involved, including the fact that they will receive smaller paychecks in January through April of 2021.
However, if you choose to participate anyway, please consider the following:
- Inform employees the deferred taxes are required to be paid back between January 1, 2021 and April 30, 2021 through payroll withholdings. This program is not a reduction in taxes. It is simply a timing difference.
- Alternative payment arrangements to collect the deferred taxes in the event of employee termination, furlough, or an employee voluntarily quitting.
- State employment law matters through consultation with legal counsel.
- In the event the deferred taxes are not collected from the employee during the repayment period (employee quits or is terminated), the employer is responsible to deposit the taxes with the Treasury by April 30, 2021 or be subject to fines and penalties.
The one potential permanent benefit from the program would be if the payroll taxes that are not paid were to be forgiven by Congress. This is the hope of the president. However, leaders in Congress on both sides of the aisle have stated that they are opposed to this forgiveness. We don’t believe that declining to implement this deferral will result in employees missing out on any tax benefits that may or may not be articulated in the future, such as tax forgiveness, which requires an Act of Congress.
Finally, we advise employers to communicate the approach selected to employees. If you have any questions or concerns, please contact your Simon Lever advisor or contact us here.