Late on Friday, the IRS finally issued guidance on Trump’s payroll tax deferral, giving employers 1 day to react and implement the guidance. The guidance allows an employer to defer withholding of the employee’s share of social security tax on its employees’ compensation from Sept. 1 through Dec. 31, 2020. But then requires the employer to withhold that deferred amount from its employees’ compensation from Jan. 1 until Apr. 30, 2021. As a result, from Jan. 1 through Apr. 30, 2021 employers will be withholding double the amount of the employee’s share of payroll taxes. This deferral of payroll tax is available only to employees who generally earn less than $4,000 per biweekly pay period ($104,000 yearly).
Even though the guidance leaves many unanswered questions, it does make clear that employers will continue to be responsible for the payment of any deferred payroll taxes. As a result, the biggest unanswered question for an employer is what to do if employees who have deferred payroll taxes in 2020 leave the company before the make-up period in 2021?
This issue affects not only employees who resign or are terminated, but also those employees who work seasonally. Since the deferral period falls squarely within the holiday season, retailers in particular may be burdened with this issue. The guidance addresses this issue by simply stating that an employer “may make arrangements to otherwise collect” the deferred taxes from its employees, but offers no other useful guidance.
In an effort to secure payment of the deferred payroll taxes, an employer may be tempted to offset the deferred amount from severance payments or the final paycheck of a departing employee. However, before enacting such policy an employer should consult with its legal counsel. Certain state law and/or employment contracts, particularly union contracts, may limit an employer’s ability to seek this form of repayment.
Before this guidance was issued, many employers were sitting on the sidelines, reluctant to implement the payroll tax deferral due to the lack of guidance. The issuance of the guidance – tardy and lacking in substance as it was – did little to encourage employers to take the plunge.