The IRS has issued new guidance on the payroll tax deferral that was ordered by President Trump's Executive Order on August 8. This guidance requires the immediate attention of employers, as the payroll tax relief is applicable to wages paid from September 1, 2020, through December 31, 2020.
Employers can defer the withholding, deposit, and payment of the employee portion of the Old Age, Survivors, and Disability Insurance segment of FICA taxes, i.e., the 6.2% tax on employee wages imposed by section 3101(a) of the Internal Revenue Code and the equivalent amount under the Railroad Retirement Tax Act (RRTA) imposed by section 3201(a), for certain employees.
The due date to deposit the payroll tax withholding during the last four months of 2020 is postponed until the first four months of 2021 for "Affected Taxpayers" if the following criteria is met:
- The deferral applies only to those whose bi-weekly paychecks are less than $4,000, the equivalent of $104,000 a year.
- The deferral applies to taxes that are incurred for pay periods September 1, 2020 through December 31, 2020.
The determination of applicable wages is to be made on a pay-period-by-pay-period basis - meaning that if the amount of compensation payable to an employee for a particular pay period is less than the threshold amount ($4,000 for bi-weekly pay periods), then the payroll tax deferral applies to that compensation, regardless of the amount paid to that employee in other pay periods.
The new guidance defines "Affected Taxpayers" as employers who are required to collect and withhold payroll taxes from their employees and does not directly address whether the deferral is optional or mandatory. Employees are not Affected Taxpayers, therefore it is not clear whether they can opt in or out of the deferral individually. However, it is clear that employers are responsible for paying the deferred taxes between January 1, 2021, and April 30, 2021 and interest, penalties and other fines will start to accumulate May 1, 2021, if the taxes have not been paid. The guidance also states that employers "may make arrangements to otherwise collect" the taxes from employees, but does not address how employers should treat the deferred taxes of employees who later quit.
There is a possibility of forgiveness, however that would require future legislation by Congress. As the current guidance does not indicate forgiveness, several questions arise regarding the deferral particularly regarding current employees who may no longer be employees in 2021. We anticipate additional clarification on this and other areas of uncertainty.
We are available to assist you in understanding and implementing this new guidance. At present, and unless forgiveness is written into legislation, appropriate planning will be important regarding the deferred payments.