IRS Releases Guidance on Presidential Memorandum to Defer Employee Portion of Payroll Tax
On August 8, President Trump issued a Memorandum directing the Secretary of the Treasury to use his authority under section 7508A of the Internal Revenue Code to defer the employee portion of Social Security tax obligations (which is 6.2%) with respect to American workers making less than $4,000 per bi-weekly pay period (or $104,000 per year) for the period from September 1 through December 31, 2020. Section 7508A allows the Treasury Secretary to postpone for up to one year the determination of tax liability (including interest and penalties) of a taxpayer who is determined by the Secretary to be affected by a federally declared disaster. The affected taxpayer for purposes of the deferral is the employer, not the employees.
IRS guidance for employers implementing the payroll tax deferral order requires the deferred taxes to be repaid within the first four months of next year, but employers will be on their own in collecting the taxes from employees. Notice 2020-65 postpones the date by which employers must withhold and pay over the employee portion of Social Security tax for workers earning less than $4,000 per biweekly pay period. Applicable wages are determined on a per payroll basis. The deferral is not applicable to the Medicare portion of the payroll taxes (which is 1.45% of eligible wages). Under the guidance, payroll taxes that would otherwise be withheld between September 1 to December 31 2020 are due between January 1 to April 30, 2021.
For the repayment, an employer is to withhold tax ratably from the employee from January 1, through April 30, 2021. Beginning on May 1, 2021, penalties and interest will begin to be applied to employers on any late payments. The IRS is allowing employers to “make arrangements” if necessary to collect the balance. This will be particularly important for employers who use seasonal employees during the holiday season.
The IRS guidance does not provide guidance on whether the deferral is elective or mandatory. Treasury Secretary Steven Mnuchin stated on August 12th that the tax deferral is voluntary. Further, Kelly Morrison-Lee, an attorney with the Internal Revenue Service, said during the IRS’s monthly payroll industry teleconference that is an employer’s decision whether to participate. In other words, employees do not have an independent right to demand the deferral of the payroll tax. If an employer elects to take advantage of the deferral, nothing in the notice would prohibit an employer from allowing each employee to choose whether or not they wish to participate in the payroll tax deferral program.
Koley Jessen continues to monitor the situation and stay current on the federal and state tax issues facing businesses and individuals. If you have additional questions or concerns as the situation develops, please contact a member of the Koley Jessen Tax or Employment Practice Group.