The IRS has issued guidance (IRS Notice 2020-65) implementing the Executive Order issued in early August by the President that directs that employees be allowed to delay their payment of certain payroll tax obligations during the ongoing COVID-19 pandemic (the “Executive Order”).
Existing Employer Delays. As you may recall, under the CARES Act, employers are permitted to temporarily delay the deposit and payment of the employer share (6.2%) of the Social Security taxes (not the 1.45% Medicare tax portion) that they otherwise are responsible for paying in 2020. The CARES Act relief is effective for payments due on and after March 27, 2020, and before January 1, 2021. Under the CARES Act, an employer who elects to delay must pay 50% of the deferred Social Security taxes by December 31, 2021, and the remaining 50% by December 31, 2022.
New Employee Delays. The new IRS guidance expands the existing employer relief by permitting employers to defer withholding from their employees’ Applicable Wages the 6.2% Social Security portion (not the 1.45% Medicare tax portion) of payroll taxes otherwise due during the September 1, 2020, through December 31, 2020 period. The due date for the withholding and payment of the deferred amount is postponed until the period beginning January 1, 2021, and ending April 30, 2021.
“Applicable Wages” means “wages” as defined in Section 3121(a) of the Internal Revenue Code (the “Code”), and “compensation” as defined in Section 3231(e) of the Code, paid to an employee on any pay date occurring between September 1, 2020, and ending on December 31, 2020, and only applies to employees with bi-weekly compensation of less than $4,000 (“Applicable Wages”). This determination is made on a pay period-by-pay period basis. This means that if an employee’s Applicable Wages fluctuates (e.g., hourly employees), the relief may apply to the employee in one payroll period, but not the next.
Should You Adopt? This relief is optional. Employers are not required to permit their employees to defer any taxes. It is important to recognize that it remains the employer’s responsibility to withhold and pay any taxes deferred under this relief. In order to pay any taxes deferred during the September 1, 2020, through December 31, 2020 period pursuant to this relief, the employer must withhold, deposit, and pay an additional amount ratably (pay period-by-pay period) over the January 1, 2021, through April 30, 2021 period to pay the deferred amount. In addition, beginning January 1, 2021, employers taking advantage of this relief must resume withholding, depositing, and paying all payroll taxes. This means that employees could face double the normal withholding obligation in early 2021.
All amounts deferred under this relief must be paid by April 30, 2021. Beginning May 1, 2021, interest and penalties will begin to accrue if all deferred amounts have not been paid.
One important question that was left unanswered in the IRS guidance is: what happens if an employer defers payroll taxes under this relief, but the employee terminates employment or takes an unpaid leave of absence prior to the payment of all amounts deferred? The guidance simply states that the employer “may make arrangements to otherwise collect” the deferred taxes. One solution could be to increase withholding on the employee’s final paycheck to withhold all amounts deferred and not already paid, but employers should be cautious in using this approach without confirming that their applicable state wage withholding laws will allow. Employers should also consider whether sufficient final pay will exist to cover deferrals. Given the number of unpaid furloughs and wage reductions implemented by employers, a larger final paycheck may no longer be the norm.
Another important question is when will payroll processors be able to support these tax deferrals. Check with your payroll processor before communicating any deferral opportunity to your employees.
We anticipate the IRS will issue additional guidance addressing this and other unanswered questions (e.g., employees with multiple jobs, etc.)
Before taking any action pursuant to this relief, employers should contact their payroll, tax, and legal advisors to discuss implementation of the relief and how to best advise employees.