2020 Payroll Tax Deferral FAQs

Last Updated on October 13, 2020 by bigfish-admin

Q: What does the IRS payroll deferral tax notice clarify or state?

A: The Order and IRS Notice 2020-65 provide guidance that employers may participate, at their discretion, in deferring payment of their employees’ Social Security payroll taxes incurred between September 1 and December 31 of 2020, with repayment scheduled for January 1 through April 30 of 2021. Only employees who receive compensation below $104,000 annually may be allowed to defer these taxes. The $104,000 annualized amount is calculated on a per-paycheck basis and translates to the following wages for the most common payroll frequencies:

  • Biweekly – $4,000 per payroll
  • Semimonthly – $4,333 per payroll
  • Weekly – $2,000 per payroll

Q: Which payroll taxes are eligible to be deferred?

A: Employee Social Security taxes for payroll dates on and after September 1, 2020 through December 31, 2020.

Q: How and when are deferred taxes to be paid?

A: The IRS has not stated how the unpaid/deferred taxes should be accounted for by employers. We expect that there may be an update to the 941 form, as well as the 2020 W-2 form, which would allow employers to identify any unpaid/deferred taxes. Guidance has not been established at this time.  Without this guidance, we do not know how the IRS will determine if an unpaid payroll tax meets the requirements for this guidance. This may lead to the IRS assessing penalties for late payments.

  • Note: The IRS has not stated how the unpaid/deferred taxes should be collected by employers and paid in a different tax year (2021 vs. 2020). The general idea is that employers would begin collecting the taxes from the employees who are participating in the program beginning on January 1, 2021.   

Q: Is this voluntary for employers? Does my organization have to implement this deferral?

A: The Order and IRS Notice 2020-65 provides guidance that employers may participate, at their discretion.

Q: What are the risks to employers should they choose to implement this?

A: Participation in this program will place additional burden on employers due to the following:

  • Employers remain responsible for the payment of the employee’s share of the deferred taxes, beginning on January 1, 2021, and all unpaid/deferred taxes must be paid to the IRS by April 30, 2021.  
  • The IRS has not stated how the unpaid/deferred taxes must be accounted for by employers. We expect that there may be an update to the 941 form, as well as the 2020 W-2 form, which would allow employers to identify any unpaid/deferred taxes. Guidance has not been established at this time. Without this guidance, we don’t know how the IRS will determine the requirements for repayment of deferred payroll taxes. This may lead to the IRS assessing penalties for late payments.
  • The IRS has not stated how the unpaid/deferred taxes should be collected by employers and paid in a different tax year (2021 vs. 2020). The general idea is that employers would begin collecting the taxes from the employees who are participating in the program beginning on January 1, 2021.   

Q: What if an employee terminates employment, takes a leave of absence, or has insufficient wages to pay back any unpaid balance due? 

A: State laws differ on how to collect unpaid debts from terminated employees. If an employee cannot pay back an unpaid balance for any reason, the employer is responsible for payment of the balance at the employer’s expense. 

An employer may incur penalties and interest for failing to deduct and pay any deferred employee Social Security taxes in the first four months of 2021. Nothing in Notice 2020-65 provides any specific relief to an employer if there are circumstances that prevent the employer from doing so.

The IRS has yet to provide guidance to payroll providers as to how to implement this program in our systems. Without this guidance, any process will be manual, which may lead to IRS notices and penalty relief requests. 

Q: How would my organization collect the deferred amount from employees?

A: The IRS has not stated how the unpaid/deferred taxes should be collected by employers and paid in a different tax year (2021 vs. 2020). The general idea is that employers would begin collecting the taxes from the employees who are participating in the program beginning on January 1, 2021.   

Q: Are there limitations on the deferral?

A: Only employees who receive wages/compensation below $104,000 annually may be allowed to defer these taxes. The $104,000 annualized amount is calculated on a per-paycheck basis and translates to the following wages for the most common payroll frequencies:

  • Biweekly – $4,000 per payroll
  • Semimonthly – $4,333 per payroll
  • Weekly – $2,000 per payroll

Q: What if an employee terminates employment, takes a leave of absence, or has insufficient wages to pay back any unpaid balance due? 

A: State laws differ on how to collect unpaid debts from terminated employees. If an employee cannot pay back an unpaid balance for any reason, the employer is responsible for payment of the balance at the employer’s expense. 

Q: Can an employer that uses a third party to report and pay employment taxes to the IRS defer deposits and payments of its employees’ Social Security taxes?

A: Yes.

Q: What are the options if we do want to participate? For an organization that decides to move ahead with the deferral, how should it be implemented?

A: As an employer, if you wish to participate in this program and accept the associated risk, these are the steps you will take:

  1. Contact your HCM Specialist via email and notify us that you wish to participate in this program.
  2. Your HCM Specialist will provide instructions for blocking employees’ Social Security tax withholdings. You will need to block the tax manually on each paycheck for each employee, and you will need to repeat the process each pay period through the end of the year.  Payroll systems are designed to self-correct Social Security taxes in order to keep the system in balance. Therefore, if you do not block the tax on each paycheck, the system will attempt to catch up by rolling over and deducting any outstanding unpaid withholdings.
  3. You will need to keep your “exceptions” report from each pay period to account for all unpaid tax withholdings for employees. 
  4. If you wish to receive a report at the end of the third and fourth quarters with a list of employees and their unpaid withholdings, please request one from our tax department.  
  5. You will need to determine how to establish accountability with every employee who defers their taxes. As the employer, it will be your responsibility to collect these taxes when they are due, and to cover any unpaid withholdings in the event that an employee is unable pay back their balance. 

Q: When do deferred withholdings of Social Security tax need to be deposited by in order to be treated as timely (and to avoid a deposit penalty)?

A: The IRS has not stated how the unpaid/deferred taxes should be collected by employers and paid in a different tax year (2021 vs. 2020). The general idea is that employers will begin collecting the deferred taxes from the employees who are participating in the program beginning January 1, 2021, with repayment scheduled for January 1 through April 30 of 2021.

Q: What should I communicate to my employees?

A:  The following are bullet points to be shared with employees.

  • This deferral is essentially a loan. The deferred taxes will need to be collected and paid to the IRS beginning January 1, 2021 and ending April 30, 2021.
  • Only employees who receive wages/compensation below $104,000 annually may be allowed to defer these taxes. The $104,000 annualized amount is calculated on a per-paycheck basis and translates to the following wages for the most common payroll frequencies:
    • Biweekly – $4,000 per payroll
    • Semimonthly – $4,333 per payroll
    • Weekly – $2,000 per payroll
  • The IRS has not stated how the unpaid/deferred taxes must be accounted for by employers.  We expect that there may be an update to the 941 form, as well as the 2020 W-2 form, which would allow employers to identify any unpaid/deferred taxes. Guidance has not been established at this time. Without this guidance, we don’t know how the IRS will determine the requirements for repayment of deferred payroll taxes. This may lead to the IRS assessing penalties for late payments.
  • What if an employee terminates employment, has a leave of absence, or has insufficient wages to pay back any unpaid balance due? State laws differ on how to collect unpaid debts from terminated employees. If an employee cannot pay back an unpaid balance for any reason, the employer is responsible for payment of the balance at the employer’s expense.
  • An employer may incur penalties and interest for failing to deduct and pay any deferred employee Social Security taxes in the first four months of 2021. Nothing in Notice 2020-65 provides any specific relief to an employer if there are circumstances that prevent the employer from doing so.

Big Fish Employer Services recommends that employers wait for additional IRS guidance before participating in this program due to the risk factors outlined above.  Should you choose to proceed, accepting the risk associated with the deferral program, Big Fish Employer Services, LLC will not be held liable for any tax, penalties, or interest incurred.

Big Fish will continue to report on further developments to this law and other paid leave laws nationwide. Information contained in this publication is intended for educational or informational purposes only and does not constitute legal advice or opinion, nor is this a substitute for the professional judgment of an attorney.

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