On August 6 President Donald Trump signed a series of executive orders that expanded economic relief to taxpayers. One of those orders calls for employee payroll tax deferrals from September 1 through December 31, 2020.
It includes the 6.2% of the employee’s share of Social Security taxes but not the 1.45% employee’s share of Medicare taxes; and it is applicable for employees with biweekly pre-tax income of less than $4,000.
In the absence of any Treasury guidance, there were several uncertainties. On Friday, August 28, four days before the start of the deferral period, the IRS issued the 3-page Notice 2020-65, which cleared up some of the concerns but left some questions unanswered. Here’s my take on it. Be cautious, and here’s why.
What It Isn’t
Apparently, it is not mandatory. The IRS Notice is silent on that matter, and there are no penalties if an employer continues to follow normal procedures and continue to withhold payroll tax.
It’s been called a “Tax Holiday,” which it isn’t. It’s a loan which the employee has to repay by April 30, 2021; at the same time, amounts have to be withheld from the employee’s paycheck from January 1, 2021, 1hrough April 30, 2021. In other words, withholding will be doubled up.
Reasons to Be Cautious
Implementation and Administration. Payroll providers are scrambling to make changes to their system to accommodate those clients that elect the payroll deferral on behalf of their employees. This at a time when there has been no IRS guidance on reporting for Forms 941 and W-2.
Potential Employer Liability. The employer is responsible for collecting and remitting income and employment tax. But what if an employee terminates employment in January 2021, and the employer cannot collect the taxes that were deferred? There is no guidance for this situation in the IRS Notice.
Potential Personal Liability. Ultimately, the “responsible party” for the collection of payroll taxes could be a shareholder, board member, corporate officer, partner, or employee who could be held personally liable.
Comfort Level: The Key Consideration
With limited guidance from the IRS, employers should carefully consider whether they are comfortable deferring the remittance of employee payroll taxes. That decision should be made in consultation with your CPA. And if the answer is no, be prepared to have a response ready for the employee who comes into your office and asks, why aren’t we doing this.