The Treasury Department and the IRS have issued guidance on the August 8, 2020, order by President Trump to defer the withholding, deposit, and payment of certain employee payroll tax obligations on wages from September 1, 2020 through December 31, 2020.
Under the guidance: 1) the due date for the withholding and payment of the employee’s portion of the 6.2% Social Security tax on applicable wages is postponed until the period beginning January 1, 2021, and ending April 30, 2021; and 2) the deferred taxes must be withheld and paid from wages and compensation paid between January 1, 2020, and April 30, 2021. This tax deferral is not available to those employee’s with taxable wages of $4,000 or more for a bi-weekly period (or the equivalent of $104,000 annually during the deferral period).
It’s important to note, that it does not separately postpone the deposit obligation for employee Social Security. That is because the deposit obligation does not arise until the tax is withheld, so by postponing the time for withholding the employee Social Security, the deposit obligation is delayed by operation of the regulations. Additionally, it does not postpone the employer’s portion of the Social Security tax.
There are two main concerns with this payroll tax deferral: 1) will employees be able to afford the double tax withheld from their paycheck during the payback period beginning January 1, 2021; and 2) how an employer handles the situation if an employee leaves the employer before the tax is paid back. Interest, penalties, and additions to tax will begin to accrue on the employer’s federal tax account on any unpaid applicable taxes beginning May 1, 2021.
We await definitive guidance from the Treasury Department whether employers have the choice to opt in or opt out on this payroll tax deferral. It is also unclear if employees can compel their employer to defer the tax. We are currently operating under the premise that the employee deferral is not required by the employer. We also recommend that employers tell an employee inquiring about the deferral that you are awaiting further guidance from the IRS and Treasury Department. Look for another post when we receive such guidance.