2020 Payroll Tax Deferral Notice

Last Updated on August 31, 2020 by bigfish-admin

In early August, President Trump signed a memorandum allowing employees to request a deferral of their employee social security tax. This is a tax deferral, NOT an exemption. Meaning, those who choose to defer social security taxes will end up owing the money at a later point in time. On Friday, the IRS released some initial guidance on how this may work… let’s take a deeper dive into the Payroll Tax Deferral.

IRS AND TREASURY ISSUED GUIDANCE ON THE PAYROLL TAX DEFERRAL

Late on Friday August 28, 2020 the IRS and the Department of Treasury issued long-awaited guidance on the payroll tax deferral, originally issued on August 8, 2020 by President Trump. 

The IRS notice (Notice 2020-65) states the following:

  • The deferral allows employers to postpone the withholding and deposit of the employee portion of Social Security Tax.
  • The deferral can be applied to gross wages or compensation paid to an employee on a pay date during the period beginning on or after September 1, 2020 and ending on December 31, 2020.
  • The deferral may only be applied to wages or compensation paid in a bi-weekly pay-period that is less than $4,000, or the equivalent threshold amount for other pay-periods. The threshold is applied on a per pay-period basis (no carry-over of shortages or overages to the $4,000, or equivalent, cap).
  • The employer must begin withholding and paying any deferred taxes ratably from wages paid beginning on January 1, 2021 and ending April 30, 2021.
  • Interest and penalties will begin to accrue on unpaid taxes beginning on May 1, 2021. 

This notice makes clear that the employer is responsible for collecting and remitting any deferred employee social security tax. Unfortunately, the notice provides little direction to employers or payroll providers as to how this logistically will operate. 

For employees who continue to remain employed by the employer in 2021, the employer could essentially “double up” the tax collection for employees from January through April of 2021 to pay back the deferred taxes, but what about employees who leave before the end of 2020? May an employer deduct the total uncollected tax from the employees’ last paycheck? What if an employer chooses not to participate in the tax deferral but an employee subsequently requests it? Is the employer obligated to comply with the employee’s request? 

Big Fish will continue to monitor for additional guidance from the IRS and Department of Treasury to answer these and other outstanding questions. In the meantime, the iSolved product development team is collaborating to discuss this additional but limited IRS guidance to determine the best methods to assist clients with the tracking of any elected employee deferrals. We will continue to update you with additional information as soon as it becomes available.

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