Read this if you are an employer.
Note: The tax deferral situation is very fluid, and information may change frequently. Please check back for updates.
The Treasury Department and Internal Revenue Service released Notice 2020-65 on August 28th, addressing the following questions highlighted in our earlier payroll tax deferral article.
Does the employer or the employee elect to defer taxes?
Notice 2020-65 provides that Affected Taxpayers are defined for purposes of the Notice as the employer, not employee. Therefore, employers will have to choose whether or not to opt-in and defer taxes. Important to note: while the notice doesn’t specifically state that deferral is optional, the IRS press release implies that it is.
It is unclear if an employee can elect out of the payroll tax deferral, if their employer elects to defer taxes. Absent guidance, it seems that an employer who elects to defer the payroll tax should apply the payroll tax deferral to all employees and not permit an employee to elect out of the deferral.
The other question for an employer is whether the payroll software will be able to accommodate the deferral feature as of September 1st. It seems highly unlikely that payroll software will be ready for the September 1st effective date. Employers should reach out to their payroll vendor to determine when the system/software will be ready.
How do bonuses, commissions, or other irregular payroll items impact the $4,000/biweekly compensation limit?
Per the Notice, Applicable Wages include wages as defined in Internal Revenue Code (“Code”) Section 3121(a) (i.e., wages for withholding FICA taxes) or compensation as defined in Code Section 3231(e) (i.e., wages for the Railroad Retirement tax) only if the amount of such wages or compensation paid for a bi-weekly pay period is less than the threshold amount of $4,000, or the equivalent threshold amount with respect to other pay periods. Additionally, the Notice states that the determination of Applicable Wages is made on a "pay-period-by-pay period" basis. Therefore, Applicable Wages would include items such as bonuses and commissions. For example, if a bonus of $2,000 caused an employee’s total Applicable Wages to exceed the $4,000 bi-weekly threshold for the respective pay period to which it relates, deferral would not be required for that pay period. In other words, payroll tax deferral applies to Applicable Wages of $4,000 or less for any bi-weekly pay period (or the equivalent threshold for other pay periods) irrespective of amounts paid in other pay periods.
Based on the guidance, an employer’s payroll system will need to be programmed to automatically monitor the $4,000 bi-weekly threshold and accumulate the tax deferral for each employee.
When and how are amounts deferred due to be paid by the employee?
An employer must withhold and pay the deferred taxes ratably from wages and compensation paid between January 1, 2021 and April 30, 2021. Interest, penalties, and additions to tax will begin to accrue on May 1, 2021 with respect to any unpaid taxes.
This means that employers who elect to initiate the payroll tax deferral will double the Social Security tax withholding during the first four months of 2021. The President’s memorandum issued on August 8th states that Secretary of the Treasury shall explore avenues, including legislation, to eliminate the obligation to pay the taxes deferred pursuant to the implementation of this memorandum. However, only Congress can pass legislation to forgive the uncollected taxes, and has thus far been unwilling to do so.
What happens if an employee who is deferring taxes stops working for the employer? Is the employer responsible for collecting the taxes that were deferred?
This question is not addressed; however, the Notice does provide that an employer may make arrangements to otherwise collect the total taxes from the employee, if other than ratably from wages and compensation.
Employers electing to implement the payroll tax deferral may be assuming unnecessary financial risk related to employees who terminate employment during the period of deferral or during the period of repayment. Prior to initiating the payroll tax deferral, an employer will need to determine (and communicate to employees) how it will collect any unpaid tax deferrals when an employee terminates employment. For example, an employer could decide to withhold the deferred taxes from the employee’s final paycheck, if it can do so legally. Further guidance is necessary so an employer can determine the appropriate way to receive payment from employees who terminate employment.
Notice 2020-65 leaves many questions still unanswered.
Most notably, who is responsible for the taxes if an employer is unable to withhold due to an employee terminating employment? The IRS issued a draft version of a revised Form 941 to take into account the deferred payroll taxes.
Additional guidance will hopefully be forthcoming. Until further guidance is issued and payroll systems are updated, it is difficult for an employer to initiate the payroll tax deferral.
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