IRS Issues Guidance on Payroll Tax Deferral Starting September 1
On August 28, 2020, the IRS issued Notice 2020-65 to provide guidance on the deferral.
First, it’s important to note that Treasury Secretary Steven Mnuchin has been quoted as saying that the deferral is optional, and several commentators have offered the opinion that it is. It does appear that the deferral is optional at the employer level, and a number of trade associations have stated that their members will not participate. However, Notice 2020-65 does not specifically address whether the deferral is mandatory or optional for employers.
At least one interpretation is that the absence of a statement that deferral is mandatory means that deferral is optional. This interpretation is bolstered by the absence of any apparent consequence if an employer chooses to not participate in deferring employee payroll taxes.
If an employer chooses to defer the collection and remittance of the employee’s portion of the payroll tax, the deferral of the tax is effective for the period September 1 through December 31, 2020 and applies to employees earning pre-tax wages or compensation of less than $4,000 during a biweekly pay period or an equivalent amount with respect to other pay periods. This does not apply to unemployed individuals, ministers who are subject to SECA tax instead of the FICA tax, and self-employed individuals. Note that employers already have the option to defer the deposit and payment of the employer’s share of Social Security under the CARES Act.
Here are the key points from Notice 2020-65 and a few remaining questions for employers to be aware of.
- Notice 2020-65 defines employers as the “Affected Taxpayers,” not employees. This means that it is the employer’s obligation to remit the employee share of the deferred payroll tax. Further, it is employers who must withhold and pay the deferred taxes between January 1 and April 30, 2021, “or interest, penalties, and additions to tax will begin to accrue on May 1, 2021, with respect to any unpaid Applicable Taxes.”
- The Notice states that “if necessary, the Affected Taxpayer may make arrangements to otherwise collect the total Applicable Taxes from the employee.” However, it does not address what happens if an employee leaves the organization before the end of the year.
- No guidance has been provided yet on how the deferral amounts will be recorded for tax purposes.