Guidance on Payroll Deferral
The Treasury Department and Internal Revenue Service released guidance (Notice 2020-65 https://www.irs.gov/pub/irs-drop/n-20-65.pdf) on August 28, 2020 that implements President Trump’s recent memorandum (https://www.whitehouse.gov/presidential-actions/memorandum-deferring-payroll-tax-obligations-light-ongoing-covid-19-disaster/) directing the Secretary of the Treasury to use his authority to defer certain payroll taxes.
What we know:
- The President’s Order is a deferral of the employee’s share of Social Security taxes for the time period beginning September 1, 2020 through December 31, 2020.
- This is the 6.2% Social Security tax, not the 1.45% Medicare tax.
- Applicable wages are wages that are defined in section 3121(a) or compensation as defined in section 3231(e) paid to an employee on a pay date during the period beginning on September 1, 2020 and ending on December 31, 2020.
- The deferral is restricted to wages or compensation paid for a bi-weekly pay period that is less than the threshold amount of $4,000, or the equivalent threshold amount with respect to other pay periods.
- $4,333 threshold for bi-monthly pay periods
- $8,666 threshold for monthly pay periods
- $2,000 threshold for weekly pay periods
- Per Notice 2020-65 “The determination of Applicable Wages is made on a pay period-by-pay period basis”.
- In other words, if you receive a bonus or other type of compensation during one bi-weekly pay period between September 1 and December 31 that makes that paycheck greater than $4,000 (or applicable threshold for your filing frequency) then that paycheck is not eligible for the deferral.
- The notice makes it clear that this is a paycheck by paycheck determination.
- An Affected Taxpayer (the employer) must then withhold and pay the total Applicable Taxes that the Affected Taxpayer deferred ratably from wages and compensation paid between January 1, 2021 and April 30, 2021.
- Thus you need to track per employee the amounts that have been deferred and begin to ratably withhold said amounts between January 1, 2021 and April 30, 2021.
- Interest, penalties and additions to tax will begin to accrue on May 1, 2021 with respect to unpaid Applicable Taxes.
What we don’t know:
- Can the Affected Taxpayer (the employer) opt out of this deferral? Does the Affected Taxpayer need consent from employee to opt out?
- Can individual employees opt out of the deferral?
- What type of documentation do you need from the employee if they opt out?
- The Affected Taxpayer (employer) is responsible for paying back the deferred tax but what if the employee leaves the company? What if the employee doesn’t make enough to ratably pay back the tax?
- The Notice states “Taxpayer may make arrangement to otherwise collect the total Applicable Taxes from the employee.” It appears that the liability for the taxes due lies with the employer and not the employee. (Note that there is debate among tax professionals on this interpretation of the notice.)
- How will this be reported for tax purposes? Will there be a revised 941?
- The IRS has released a draft of Form 941 as of August 28, 2020. It can be found here: https://www.irs.gov/pub/irs-dft/f941–dft.pdf
- What about Social Security for self-employed persons?
- This is a deferral of taxes under Section 3101(a) which is employment-related taxes only. Self-employment taxes are found under Section 1401 and thus we strongly believe this is not eligible under the CARES Act for deferral.
Please look for updates on our website when additional guidance is issued.