IRS releases guidance on payroll tax deferral, but questions remain

On August 8, 2020, the President signed an executive order directing the Treasury Department to defer the withholding, deposit, and payment ofthe employee portion of social security taxes (6.2%) for the period beginning September 1, 2020, and ending December 31, 2020.  The IRS also recently released IRS Notice 2020-65, but questions still remain. Currently though, it appears deferral is available for any payment to an employee of taxable wages of $4,000 or less for any bi-weekly pay period (or the prorated equivalent for other payroll periods), and that participation in the deferral program is optional, on the part of the employer.  But it is unclear whether the employee can opt-out if their employer participates in the program.

If an employee were to earn the full $4,000 every 2 weeks, the amount deferred is $248 each bi-weekly payroll, through the end of the year.  The deferred taxes though would have to be repaid ratably over a 4-month period starting January 1, 2021 and ending April 30, 2021. Employers would have to collect and remit those taxes over that 4-month period.  But questions remain as to how to accomplish that if the employer is unable to collect from the employee during that period (employee quits or is fired, doesn’t have enough wages, etc.) and whether or not the employer will still be liable for those taxes in that case.

The next step for employers is to work with their tax professionals to determine if they should participate in the program, if they will allow employees to opt out, and how to set up a repayment structure with employees ahead of time.  The tax professionals at ShindelRock are ready to assist you with these issues, so please don’t hesitate to reach out with questions.