UPDATE: Further Clarification on the Payroll Tax Deferral Executive Order of Aug. 8, 2020
On Aug. 28, 2020, the IRS issued further guidance on the deferral of certain employee payroll taxes from President Trump’s Aug. 8, 2020 Executive Order (EO). IRS Notice 2020-65 clarifies certain items, but the EO is still subject to change and many questions remain unanswered.
Under the EO, summarized in our August blog, employees earning less than $4,000 bi-weekly are eligible to defer their payment of the Social Security tax portion of FICA, which is 6.2% of their gross wages. Payroll tax deferrals can begin Sep. 1, 2020 and continue through Dec. 31, 2020. Employees electing to do so would take home a larger paycheck during this time.
The caveat though is that the deferred taxes would need to be paid in 2021. So, although it might alleviate some financial burden for your employees in 2020, it could cause financial challenges for them in 2021 when the deferred taxes need to be paid in addition to their current payroll taxes.
Some Items of Clarification from IRS Notice 2020-65 (but Still Subject to Change):
- Deferral of the employee’s share of Social Security taxes is voluntary by the employer, so the employer may forgo offering this deferral to its employees.
- Under Notice 2020-65, the employer is the “Affected Taxpayer”, and therefore an employee cannot require its employer to defer the taxes.
- The option to defer only applies to employees earning less than $4,000 bi-weekly pay period; this determination of earnings is made on a pay period-by-pay period basis.
- The employer must withhold the deferred taxes and the employer is responsible for paying the deferred taxes to the government between Jan. 1, 2021 and Apr. 30, 2021.
- Interest and penalties will start to accrue on May 1, 2021 on any unpaid applicable taxes. Notice 2020-65 implies that these would be imposed on the “Affected Taxpayer” (the employer) and not on the employee.
What Are Still Some of the Unknowns?
- What happens if the employee leaves the company?
- What happens if the employee doesn’t make enough money to pay the tax back?
The employer may make arrangements to otherwise collect the total applicable taxes from the employee. However, it appears that in both situations notated above, the employer will be obligated to pay the deferred taxes to the government.
This article does not represent legal advice. Employers who choose to offer this tax deferral to its employees should seek the advice of legal counsel.
- September 19, 2020, Volume X, Number 264, The National Law Review. “IRS Issues Guidance on Deferral of Certain Employee Payroll Taxes”, September 3, 2020.
- August 28, 2020, IRS Notice 2020-65