On August 8, 2020, President Trump issued a memorandum authorizing the deferral of payroll taxes for certain employees from September 1, 2020 through December 31, 2020. On August 28th, the IRS released Notice 2020-65 providing guidance to employers about how to implement the deferral. While helpful, the guidance still leaves many open questions about the practical implementation of the deferral and the risks to employers participating in this program.
The payroll tax deferral applies to the period from September 1 to December 31, 2020. The deferral is optional and is available with respect to any employee “whose wages or compensation, as applicable, payable during any bi-weekly pay period generally is less than $4,000…” The Notice provides that all employers are able to take advantage of this program. The eligibility of an employee is determined on a period-by-payroll basis. The IRS excludes compensation that is not part of the FICA wage base from this eligibility determination.
Employers will be required to deposit the deferred taxes “ratably from wages” paid between January 1, 2021 and April 30, 2021. While the Notice provides that employers may “make arrangements to otherwise collect” the deferred taxes, employers will not be relieved of their obligation to deposit the taxes and employers will remain liable for payment of the deferred taxes regardless of whether they collect the deferred taxes from their employees. Further, any deferred taxes that are not deposited by April 30, 2021 will be subject to penalties and interest.
While Notice 2020-65 helps clarify the answers to some questions, it still leaves many others and does little to incentivize employers to participate in this program. Determining the eligibility of employees may be particularly cumbersome for taxpayers with hourly employees or employees earning commissions, as their income may fluctuate each pay period. Further, employers will either need to explain to their employees why their take home pay will be reduced during the first four months of 2021 or otherwise provide a mechanism to collect the deferred taxes from their employees.
Aside from these practical considerations, there are financial risks to employers as well. If an employee leaves, the liability for unpaid taxes appears to fall on the employer, regardless of whether the employer can recoup the deferred taxes. If an employer offers to pay the deferred taxes on behalf of an employee, such a payment would appear to be additional taxable income, generating additional income and payroll tax withholding requirements. Further, penalties and interest may become due if or when such deferred taxes are not paid or are paid late, potentially including a “Trust Fund Recovery Penalty” equaling 100% of the tax. For these reasons, despite the additional IRS guidance, we continue to recommend caution in taking advantage of this program.
If you have trouble or need additional guidance with the new payroll tax deferral, contact any one of our tax professionals.