On August 28th, the IRS issued guidance to implement the payroll tax withholding and payment deferral provided in President Trump’s Presidential Memorandum of August 8th. The Guidance clarifies certain aspects of the payroll tax relief and the period over which the deferred payroll taxes must be paid. While the Guidance clarifies certain aspects of the Presidential Memorandum, certain aspects remain unresolved.
Under the Guidance, employers are allowed to defer the withholding and payment of the employee portion of social security tax (FICA @ 6.2%) on wages paid during the period of September 1, 2020 through December 31, 2020, but only if the employee’s wages payable during a bi-weekly payroll period are less than $4,000, or the equivalent amount for other payroll periods.
The guidance is clear that it only allows for a tax deferral and it does not eliminate the employer’s or employee’s liability for the deferred payroll taxes. An employer that defers an employee’s payroll taxes must withhold and pay all of the deferred taxes from the employee’s wages that are paid during the period January 1, 2021 through April 30, 2021. This is known as the “payment period”. If the employer does not pay all the deferred payroll taxes by May 1, 2021, interest, penalties and additions to tax will begin to accrue on the unpaid taxes.
Although the Guidance answers some questions concerning the payroll tax deferral, it leaves other questions unanswered. Is this mandatory for employers? Do employees have to “opt-in” or is it automatic? Which employees are truly eligible? Are employers ultimately responsible for collecting the repayment later? What if an employee leaves after deferring the tax; does the employer still have to pay it?
Employers should speak with their accountants to determine what direction is best for their company.