Earlier this month President Trump issued a memorandum directing Treasury Secretary Mnuchin to allow for the deferral of the withholding and remittance of the employee portion of federal payroll taxes from September 1, 2020 through December 31, 2020 for workers earning less than $4,000 bi-weekly. With the memorandum taking effect on September 1 and no guidance from the U.S. Department of Treasury, employers and payroll processers were left asking questions.
On August 28, 2020, the IRS issued long-awaited guidance for employers on the payroll tax deferral. But, the guidance raises more questions than answers.
What do we now know from the IRS guidance?
- An employer can elect whether or not to participate in the payroll tax deferral.
- "Applicable wages" are determined on a pay period by pay period basis, i.e. it is possible an employee's wages may be eligible during some pay periods but not others if pay fluctuates.
- The taxes are merely deferred, not forgiven, unless further action is taken by Congress.
- Employers, not employees, are on the hook to pay the deferred taxes to the federal government. Under existing tax law, an employer is liable for payroll taxes, including the employee portion of social security taxes, even if it is not withheld from an employee. Nothing in the guidance or the Presidential Memorandum changes that principle.
- Employers are required to ratably deduct the deferred taxes from wages paid to the employee during the period January 1st through April 30th 2021, and then pay them to the IRS. These deductions are in addition to the employee's regular federal payroll taxes for that period.
- If necessary, employers can make other arrangements to collect the deferred taxes.
- Employers will begin to accrue interest and penalties on May 1, 2021 if the deferred taxes are not paid.
The guidance is silent as to whether an employee can choose to opt-in or opt-out of the program regardless of the employer's choice; what employers should do if an employee ceases to be employed before or during the repayment period or does not make sufficient wages to cover the deferred tax; or address the various state and local laws that restrict employer deductions from wages. Further, many employers may find the costs and administrative burdens of implementing the deferral outweigh potential benefits.
It is unclear whether the IRS will issue additional guidance to address these issues, or if Congress will eventually pass legislation to forgive the deferred taxes.
The payroll tax deferral is complicated and the IRSguidance has not added clarity. It is critical that you engage your tax advisor to discuss how the payroll tax deferral program may affect your business.
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