IRS Payroll Tax Deferral Guidance Puts Load on Employers

August 30, 2020

The IRS issued guidance Friday (Notice 2020-65) on the payroll tax deferral for wages paid starting September 1. Unfortunately, the guidance leaves important questions unanswered.

What we know:

- Only FICA taxes - the 6.2% portion of the federal payroll tax on employees - (and the Railroad Retirement equivalent) are deferred. Medicare taxes are not covered.

- Only taxes on employees earning under $4,000 for a bi-weekly pay period are deferred. This is a cliff effect rule - if an employee earns $4,010 dollars in a bi-weekly period, none of the FICA taxes are deferred. If the employee earns $3,990, though, they all are deferred. If the payroll period isn't bi-weekly, the limits are adjusted accordingly. 

- The determination is repeated independently for each pay period.

- The employer is responsible for collecting and remitting the deferred taxes starting in January by increasing withholding on employee earnings.

- If the employer withholds FICA anyway, they have to remit the taxes under the usual rules.

What we think we know, but aren't yet sure:

- It doesn't appear that employers are required to participate in the withholding deferral. 

- Employers may make "other arrangements" to collect the deferred FICA from employees. It's not clear what this means

- Employers are apparently responsible for ponying up the taxes of employees whose FICA taxes are deferred if the employee leaves before the deferred taxes are paid.

- Self-employed taxpayers appear to get no deferral break.

What we don't know:

The Trump administration promises to push for forgiveness of deferred taxes if it is re-elected. Forgiveness requires Congressional approval. We don't know how the election will come out, or whether the new Congress will go along with the forgiveness.

Considering the potential employer liability for FICA taxes for employees who leave, and the awkwardness of increasing withholding in 2021 to make up for 2020 deferrals, it's uncertain how many employers will go along with the deferral - especially considering the major programming and logistical difficulties of implementing the change on very short notice. Forbes commentator Kelly Phillips Erb isn't optimistic:

There are so many unanswered questions. With just days to go before the deferral period begins - that’s Tuesday - I don't see how this will actually roll out on time. If employers were looking for clear direction from Treasury and the IRS, this is not it.

I think additional guidance is likely. Stay tuned.

Other coverage:

Ed Zollars: Guidance Issued on Deferral of Employee OASDI Withholding Set to Begin on September 1.

Alistair Nevius, Journal of Accountancy - Guidance issued on payroll tax deferral

Gail Perry, CPA Practice Advisor - IRS Issues Guidance on Payroll Tax Deferral


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