On August 28, 2020, the Internal Revenue Service (IRS) issued guidance (Notice 2020-65) regarding the payroll tax deferral outlined in an August 8 Presidential Memorandum. Following the initial release of the memo, taxpayers, tax advisors and others were left with several questions on the implementation and effectiveness of the deferral. Notice 2020-65 offers some answers.
What was in the August 8 memo?
On August 8, 2020, the president declared a payroll tax “holiday” via presidential memorandum. Effectively, the memo directs the Department of Treasury to exercise its authority to temporarily suspend the withholding deposit and payment of some employee’s share of the payroll tax. The suspension is effective for taxes due on wages paid between September 1, 2020 and December 31, 2020.
The payroll tax deferral essentially acts as a loan that will need to be repaid, barring future action from Congress. It is not a full relief of the payroll tax.
- Employer participation is optional, per informal remarks from Treasury Secretary Steven Mnuchin.
- Not all employees qualify. Rather, there is a $4,000 threshold, calculated on pre-tax basis on bi-weekly pay periods.
- Taxes are still owed. Again, the memorandum strictly defers the payment; the payroll taxes must still be paid at a later date.
- Memorandum constitutionality is questionable. Per Article I, Section 8 of the Constitution, it does not appear that the president has the authority to defer, implement or set tax rates. In addition, existing IRS regulations appear to prohibit any deferral of payroll taxes, which may preclude Treasury from unilaterally allowing a payroll tax holiday.
What does the August 28 IRS guidance clarify?
On August 28, 2020, the IRS issued Notice 2020-65 to provide guidance on the payroll tax deferral outlined in the August 8 memorandum. The notice explains that companies will be responsible for collecting and paying back any deferred payroll taxes.
Generally, the guidance implements the president’s order to defer payroll taxes for millions of workers. Therefore, employers can elect to defer the withholding, deposit, and payment of the employee’s portion of Social Security taxes paid from September 1 through December 31, 2020. Employers who defer the payroll taxes must withhold and pay the deferred tax ratably from wages and compensation paid to the employees between January 1, 2021 and April 30, 2021. This means that workers will have double the deduction taken from their paychecks next year in order to pay back the deferred portion.
The deferral applies to any employee whose pretax wages or compensation during any biweekly period is generally less than $4,000.
Finally, the notice requires affected employers to withhold and pay the deferred taxes from wages and compensation paid during the period between January 1, 2021, and April 30, 2021. Interest, penalties, and additions to tax will begin to accrue on unpaid taxes starting May 1, 2021. The notice says that, if necessary, employers can “make arrangements to otherwise collect the total Applicable Taxes from the employee,” but does not provide details on that requirement.
It is important to note that the choice to defer withholding, deposit, and payment of the Social Security taxes is optional.
What questions remains?
The Trump administration maintains that they will push for forgiveness of deferred taxes if re-elected. Forgiveness requires Congressional approval. We do not know how the election will come out, or whether the new Congress will agree to grant forgiveness.
Considering the potential employer liability for FICA taxes for employees who leave, and the awkwardness of increasing withholding in 2021 to make up for 2020 deferrals, it is uncertain how many employers will go along with the deferral – especially considering the major programming and logistical difficulties of implementing the change on short notice.
Beyond this overarching dilemma, other uncertainties remain. For example, it is unclear whether employers are responsible for ponying up the taxes of employees whose FICA taxes are deferred if the employee leaves before the deferred taxes are paid. Also, it appears that the deferral option is not available for self-employed taxpayers, but again, we are unsure of this at the moment.
It is our hope that the IRS and Treasury will provide further guidance and clarity on several of these issues.
How can Squar Milner help?
Your tax advisors at Squar Milner are committed to keeping you informed and aware of the latest guidance and changes, particularly in regards to COVID-19 relief orders and bills.
As we receive further guidance, we will work with you and your team to ensure that you are making the best decisions for your business not just for the short term, but for the long term as well. Please contact us with any questions regarding COVID-19 relief measures, tax planning, business strategy or more. We care about the success of your business.
Disclaimer: This material has been prepared for informational purposes only, and is not intended to substitute for obtaining accounting, tax, or financial advice from a professional tax planner or financial planner. All information is provided “as is,” with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information.