IRS Issues Guidance Regarding Employee Payroll Tax Deferral
On August 28th, the IRS issued notice 2020-65 in response to the Trump Administration’s August 8th Executive Memorandum providing guidance to employers on the deferral of employee payroll tax obligations. The notice indicates that employers may defer the withholding, deposit and payment of the employee portion of the FICA taxes, such as the 6.2% tax on employee wages. The deferral applies to wages paid between September 1, 2020, and December 31, 2020. It is important to note that these employee payroll taxes are only being deferred—they are not being forgiven, and must be repaid in Q1 of 2021.
The payroll tax deferral is available for employees who have wages of less than $4,000 per biweekly payroll period between September 1 and December 31, 2020. For clarification, wages are equal to Form W-2 Box 3 wages (wages subject to FICA taxes, including elective deferrals to 401(k) retirement plans). While not specifically addressed in the notice, it appears that employers have a choice in whether or not to implement the employee payroll tax deferral, based upon the language included such as ‘allowing’ deferral and the deferral is ‘available’ to employers.
Employers must withhold and pay any deferred payroll taxes from employee earnings in the period between January 1, 2021, through April 30, 2021, on a ratable basis. If necessary, employers can make arrangements to otherwise collect the deferred taxes from employees. Deferred taxes not paid by April 30, 2021 are subject to the normal interest and penalty beginning on May 1.
Employers who elect to implement the tax deferral should be prepared for the possible case where an employee with deferred taxes leaves the company before the deferred taxes are collected. Employers might consider ‘arrangements to otherwise collect’ deferred taxes if this occurs, such as collecting the taxes due from the employee’s final paycheck. Be sure to check with your state regarding wage payment laws and the employer ability to implement this type of arrangement.
For further information, taxpayers are directed to call Notice 2020-65 Hotline at (202) 317-5436.