In a recent notice,
the IRS has provided guidance to employers regarding the Presidential Memorandum
issued on August 8, 2020. The directive, which was issued in light of the COVID-19 pandemic, allows employers to defer the withholding, deposit and payment of certain payroll tax obligations. Keep in mind, employers can choose to implement this policy or not; the decision is at the employer level, not the employee. If the employer implements the policy, there is no current guidance as to whether an employee can individually opt out of this.
Deferred Payroll Taxes: The Secretary of the Treasury determined that employers who are required to withhold and pay the employee share of the 6.2% social security tax (or the 6.2% railroad retirement tax equivalent) are considered affected by the COVID-19 emergency for purposes of this relief provision. Thus, any employer who withholds and pays these taxes is considered an “Affected Taxpayer” and can benefit from the relief.
Applicable Wages: Wages qualifying for the deferral are wages paid beginning on September 1, 2020 and ending on December 31, 2020. This only applies to wages less than $4,000 for a bi-weekly period (calculated on a pre-tax basis). Note – because of this threshold, bonuses paid within this time frame may be subject to the social security tax and due for that pay period.
Payment of Deferred Taxes: For “Affected Taxpayers”, the taxes that were deferred will be paid ratably between January 1, 2021 and April 30, 2021. If the deferred amounts are not paid by the employer by May 1, 2021, interest, penalties and additions to tax will begin accruing on that date. However, the IRS noted employers “may make arrangements to otherwise collect”.
Other Considerations: As this provision is relief related to COVID-19, it does appear an employer could decide the relief is not needed and pay these payroll tax obligations as normal. Additionally, there is very little guidance on what happens if an employee quits prior to the deferred taxes being paid back. As of right now, it appears that the employer would be responsible for paying the deferred taxes to the IRS and would then need to try to collect the taxes from the former employee. We do not envision many employers opting in to this provision as there is considerable risk and headache for the employer and for the employee. Essentially, it amounts to a short-term loan that will need to be paid back at the beginning of 2021.
As always, please reach out to us with any questions you may have regarding this payroll tax deferral provision.