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IRS Clarifies Employers May But Are Not Required to Implement Payroll Tax Deferral

Naya Pearlman, J.D., LL.M.

09.4.20 | Client Alert – COVID-19 Update

Yesterday, the IRS confirmed that President Trump’s payroll tax deferral is optional for employers. During a teleconference with the payroll industry, an IRS attorney clarified that employers may but are not required to implement the executive order. The payroll tax executive order allows employers to defer the withholding of the employee’s portion of Social Security tax for employees making less than $4,000 on a biweekly pay period.

Despite the effective date of September 1, 2020 and the IRS Notice 2020-65, many questions remain unanswered. The Notice provides basic guidance for employers and explains that employers are required to remit the deferred tax ratably during the first four months of 2021. However, the Notice does not explicitly address situations where an employee quits or is terminated before or during the 2021 repayment period. Instead, it simply states that an employer may make arrangements to collect the taxes from the employee. There are also unresolved questions about whether an employee can opt-out or how the payroll tax deferral interacts with state and local laws.

We expect more guidance to be released from the IRS in the upcoming days. Please reach out to your Berdon Advisor with any questions.