IRS Issues Guidance on Deferral of Payroll Tax Withholding

On August 8, 2020 President Trump released a "Presidential Memorandum," directing the Secretary of the Treasury to delay collecting, depositing and paying the employ portion of certain payroll taxes.

The IRS, on August 28, 2020, published Notice 2020-65 as guidelines for implementing the President’s directive. The guidance allows employers to delay the employee portion of the 6.2 percent Old-Age, Survivors and Disability Insurance (OASDI), or the railroad retirement tax equivalent under IRC Section 3202(a), for workers earning less than $4,000 during a two-week period on wages paid during the period September 1, 2020, through December 31, 2020. The $4,000 wage threshold limits the deferral to employees making no more than $104,000 per year.

It is important to note, however, that employers who delay payroll taxes under this notice must withhold and pay the total deferred payroll taxes ratably from wages and compensation paid to employees between January 1, 2021, and April 30, 2021. Interest, penalties and additions to tax will begin to accrue on unpaid payroll taxes beginning on May 1, 2021. The employer may make arrangements to otherwise collect the deferred taxes from the subject employees.

The IRS also clarified that the notice does not separately postpone the deposit obligation. Thus, employers that continue to withhold taxes must continue to deposit the withheld amounts.

This situation raises a number of issues for employers. The Presidential Memorandum and the IRS notice delay, but do not forgive, the applicable payroll taxes, as tax forgiveness requires legislation. Thus, employers who delay payroll taxes in response to this notice will have to withhold a larger amount than normal from employee paychecks beginning January 1, 2021, through April 30, 2021, to pay the delayed taxes. There are also questions regarding whether the employer would be liable for the delayed taxes for an individual who is no longer employed on January 1, 2021.

Employers are not required to delay withholding payroll taxes. Given the uncertainties, many employers will likely decide not to do so.

If you have questions or need advice on your specific situation, please contact us. We’re here to help.

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