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IRS Releases Guidance on Implementing September 1st Payroll Tax Deferral

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

08.31.20 | Client Alert – COVID-19 Update

Just days before the September 1st start date, the IRS released Notice 2020-65 to provide some basic guidance for employers implementing the payroll tax deferral pursuant to President Trump’s executive order. Earlier this month, the President directed that the employee’s portion of Social Security taxes (6.2% of wages) from September 1, 2020 through the end of the year be deferred for workers making less than $4,000 on a biweekly basis. The executive order does not affect the employee’s share of Medicare tax or the employer’s share of payroll taxes for such workers.

The new guidance confirms that the employee’s share of Social Security taxes on applicable wages (that are less than the threshold amounts of $4,000 on a biweekly basis) be deferred until 2021, but clarifies that the determination of applicable wages is made on a pay period by pay period basis. Thus, the relief is available to employees who have wages less than the pay period threshold amount irrespective of the amount of wages paid to the employee for other pay periods. The effect of the deferral is to increase the take home pay of the worker for that pay period. However, under the new guidance, the employer must then withhold and remit the deferred applicable taxes ratably from wages paid between January 1, 2021 and April 30, 2021. If necessary, the Notice provides that the employer may make arrangements with the employee to otherwise collect the total applicable taxes deferred. Interest, penalties, and additions to tax will begin to accrue on May 1, 2021 with respect to any unpaid applicable taxes.

The 3-page IRS guidance still leaves questions unanswered. Treasury Secretary Steven Mnuchin has previously said that companies will not be forced to implement the deferral but whether the directive is optional is unclear. Furthermore, while the President has publicly expressed the intent to forgive the payroll tax deferral, whether forgiveness is still on the agenda and can be achieved may be dependent on Congress and the President’s re-election. Without forgiveness, workers will face higher withholding in 2021, which only shifts the tax burden to the first four months of the following year.  With all of these questions, it remains to be seen how many companies actually implement the payroll tax deferral, if at all, on time for the next payroll check.

Please stay tuned and reach out to your Berdon Advisor for more information on this and related topics.