On August 8, President Trump issued a Memorandum that allowed employers to defer withholding and payment of an eligible employee’s portion of Social Security payroll tax obligations on wages paid from September 1, 2020 through December 31, 2020. The Memorandum states that the payroll tax deferral is available for employees whose bi-weekly wages are less than $4,000, and that the amount deferred will not be subject to any penalties or interest, but otherwise authorizes Secretary Mnuchin to issue additional guidance to implement the payroll tax deferral, including whether such payroll tax obligations should be forgiven rather than merely deferred.
Guidance under Notice 2020-65
On Friday, August 28, the Internal Revenue Service (IRS) issued its initial guidance via Notice 2020-65, which provides further direction on the application of the bi-weekly wages threshold, including clarification that the threshold is to be applied on a pay period-by-pay period basis, and states that the obligation is to be deferred, rather than forgiven, with repayment ratably from the employee’s wages paid beginning January 1, 2021, and ending April 30, 2021. Further, interest, penalties, and additions to tax will begin to accrue on May 1, 2021, with regard to any unpaid taxes. However, though the Notice provides needed clarification on a few matters, many questions still remain regarding the implementation of the payroll tax deferral, which is leading many businesses to take extra caution before deciding to participate in such a program.
Questions Remain for Payroll Tax Deferral
The American Institute of CPAs (AICPA, of which Windham Brannon is a member) and many other business advocate organizations have written letters to the IRS and the Department of the Treasury urging additional guidance on many outstanding questions, such as:
- Should an eligible employee be required to make an affirmative election to defer such taxes and, if so, how should such election be made? Such an affirmative election is expected to protect the employer by placing the decision to elect to defer with the employee.
- Is the election to defer subsequently revocable by the employee and, if so, when would the revocation of the election go into effect?
- How will the obligation be repaid if the employee is no longer employed during the repayment period in early 2021? Although the Notice states that the employer may “make arrangements” to otherwise collect the deferred tax from the employee, it provides no further guidance on how such arrangements should be implemented.
- Would the increase in take-home pay due to the deferred payroll tax be used to satisfy other employee obligations such as 401(k) loan repayments, garnishments, and child support payments?
- If an employer does not participate in the payroll tax deferral program and the law is subsequently changed that the deferred payroll tax is forgiven, rather than deferred, will remedies be available to recover any such taxes that were withheld and paid?
What to do Now?
The ambiguity and unanswered questions related to the payroll tax deferral program is causing many businesses to hesitate from implementing it at this time. Concerns remain, not only about who bears the ultimate liability of such deferral, but even how employers should best notify employees of the impact of such deferral and how it would impact the employee’s paychecks not only currently but into 2021. Windham Brannon will continue to keep you posted as further guidance on the payroll tax deferral program is provided, and work with you to develop a plan of action that is right for you and your business.
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About the AICPA
The AICPA is the world’s largest member association representing the CPA profession, with more than 431,000 members in the United States and worldwide, and a history of serving the public interest since 1887. Members advise clients on federal, state and international tax matters and prepare income and other tax returns for millions of Americans. Members provide services to individuals, not-for-profit organizations, small and medium-sized businesses, as well as America’s largest businesses.