IMPORTANT UPDATE:
Late on Friday, August 28th, the IRS issued guidance on the payroll tax deferral that was ordered by the President (see original article below). The notice allows employers to defer withholding on employees’ compensation during the last four months of 2020 and then withhold those deferred amounts during the first four months of 2021.
The payroll tax holiday is not mandatory, so it’s possible employers may not participate. There do not appear to be any penalties for non-participation, although this could change.
Under the guidance, employers can defer the withholding, deposit, and payment of certain payroll taxes on wages paid from Sept. 1 through Dec. 31, 2020. The due date for withholding and payment of these taxes is postponed until the period beginning January 1, 2021, and ending April 30, 2021.
The notice requires affected employers to withhold and pay the deferred taxes from wages and compensation paid during the period between January 1, 2021, and April 30, 2021. Interest, penalties, and additions to tax will begin to accrue on unpaid taxes starting May 1, 2021. The notice says, that, if it is necessary, employers can “make arrangements to otherwise collect the total Applicable Taxes from the employee” but does not provide details on that requirement. If an employer does not pay the deferred payroll tax to the IRS by April 30, 2021, it could be liable for penalties and late fees.
Some experts have weighed in saying that whether or not to “suspend” withholding of employees’ payroll tax was “voluntary,” because the langugae of the notice is directive, and includes no penalties for noncompliance.
A draft version of a revised form 941 has been released which asks for the deferred amount of the employee share of Social Security tax included in line 13b.
ORIGINAL ARTICLE: President Trump issued an Executive Order on August 8, 2020, deferring payroll taxes from September 1, 2020, to December 31, 2020. He was hoping to address issues left unresolved by Congress, unable to agree on additional bipartisan stimulus legislation before its summer break. The key here is the word “deferral” not forgiveness. It’s likely that this would have to start to be repaid in January. That would be a burden on employees if Congress doesn’t get around to enacting forgiveness. The payroll tax deferral only applies to employees with biweekly pre-tax income of less than $4,000. The Executive Order only applies to the 6.2% employee’s share of Social Security taxes. It does not apply to the 1.45% employee’s share of Medicare taxes.
The Treasury Department is expected to issue guidance on how the deferral will work and address a number of uncertainties. For example: if employees leave between now and the end of the year, will the employer be required to recoup the money out of their own pockets? What ability would they have to claw some of that money back from employees that may have left or ones that no longer have the wherewithal to pay?
Employers that defer the payroll taxes would need to start collecting those taxes from payroll starting next January, unless Congress passes legislation waiving the taxes. Payroll-processing companies also are eagerly anticipating guidelines from the Internal Revenue Service and the Treasury Department on how to handle the payroll tax deferral so they can start processing paychecks next month.
The outcome of the November election may determine the situation. The prospect of a big tax bill for taxpayers next year is likely to induce Congress to pass legislation forgiving the deferred taxes, but that will depend on who’s in control of Congress and the White House next year. Regardless, the IRS and the Treasury must provide some immediate guidance on the payroll tax deferral before the end of August.
The Obama administration cut payroll taxes for employees from 6.2 to 4.2% for 2011 and 2012. The CARES Act included a deferral of the payroll tax for employers, which lets most employers defer payment of their portion of Social Security taxes without interest or penalties. 50% of the deferred amounts will be due by December 31, 2021, and the rest by December 31, 2022.
Reach Out To Us: There are issues for our clients on both sides of the table – Employers and Employees. We will keep clients informed in order to do whatever’s necessary to keep up with the tax law. We advise clients to wait for the guidance to be released before making any changes. We will advise what reporting is going to be required, if there’s going to have to be something on the W-2, and other necessary details. Keep in mind, some employees may not elect to take the deferral not relishing the prospect of owing a great deal of money on their annual 1040 at the end of the year. Got questions? Email us at CPA@Fuoco.com.
