In an effort to help American workers affected by the ongoing COVID-19 crisis, President Trump issued a Presidential memorandum on August 8th, directing the Secretary of the Treasury to defer the withholding, deposit and payment of certain payroll tax obligations, specifically those relating to the social security portion of FICA. On Friday, August 28th, nearly four weeks after the order, the IRS provided much-anticipated guidance via Notice 2020-65, to help employers navigate this new directive which became effective September 1, 2020.
However, there are still areas of the President’s directive that require clarification and additional guidance from the US Treasury Department. What happens if an employee is terminated or furloughed before the deferral is paid back? Are employees able to opt out of the program? Will the employer be held responsible for any taxes unable to be withheld? These are just a few of the questions on the minds of business owners.
Here are four items you should know about the payroll tax deferral:
- Not a Requirement. First and foremost, an employer is not required to defer the withholding of the employee’s share of the social security tax. The guidance simply makes the option voluntary.
- Deferral Options. Eligible employers have the option of deferring the withholding, deposit and payment of the employee share of the social security tax (6.2%) on wages paid from September 1, 2020 through December 31, 2020.
- Eligibility. The deferral is available for employees who gross $4,000 or less in wages (before tax) for any bi-weekly pay period. It’s important to note that an employee with a variable wage structure could be eligible for deferral one pay period but not the next pay period, which will complicate the calculation process.
- Repayment Timeline. Employers who chose to defer withholding will be obligated to pay the deferred taxes from January 1, 2021 through April 30, 2021. Interest and penalties will be applied to unpaid deferred taxes beginning May 1, 2021. It’s important to note that under the current Notice, the deferred tax is simply postponed, not forgiven.
While the guidance may appear to put more cash into employee paychecks, the long-term effects and potential employer tax liability exposure of this deferral still raise questions and concerns for many employers. We strongly encourage you to talk to your accountant or financial advisor to decide your best course of action. We will continue to update this article with new information as it becomes available.