On Friday, August 28, the Internal Revenue Service (IRS) issued guidance on deferring an employee’s portion of Social Security tax for the period beginning September 1 and running through the end of the year. The guidance sets rules for implementing President Trump’s Memorandum on Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster, which was issued August 8.

Although the President has made it clear he wants permanent forgiveness of these taxes, for now taxpayers will still ultimately owe any deferred payroll taxes and employers will be responsible for the collection and payment of those deferred taxes to the IRS in 2021. 

As with other coronavirus-related relief, the payroll tax deferral includes complex guidelines that are likely to be updated. We will stay on top of updates and communicate any material changes.

In Notice 2020-65, the IRS laid out these specifics for payroll tax deferment:

  • Only employees with pre-tax wages less than $4,000 in a biweekly pay period are eligible for the payroll tax deferral. Employees with wages of $4,000 or more in a biweekly pay period may not defer payment of their payroll taxes.
  • The deferral applies to the employee portion only of Social Security taxes. Employees currently pay 6.2% of each paycheck for SS tax, subject to limits. The employer portion, also 6.2%, will still be due on time.
  • Payment of deferred taxes is postponed until the period beginning January 1, 2021 and ending April 30, 2021. During this period, employers will effectively have to withhold an employees’ current payroll taxes as well as their deferred ones from paychecks. Employers are to “ratably” deduct the deferred taxes from paychecks during this period, according to the IRS.
  • Employers will be responsible for withholding and paying deferred payroll taxes by April 30, 2021, or be subject to interest, penalties, and additional taxes beginning on May 1.

While the IRS guidance was intended to clarify and set steps for implementing President Trump’s payroll tax deferral order, there are still many questions. For instance, how does an employer deal with an employee who quits or takes a leave of absence and isn’t receiving a paycheck between January 1 and April 30? The IRS notice states employers may make arrangements to otherwise collect the deferred taxes from employees but provides no guidance on how.

Also, neither the IRS guidance nor Trump’s order mandates that employers defer the withholding of payroll taxes. Each employer needs to decide for themselves whether they should offer to defer their employees’ Social Security taxes, accept the responsibility for the record keeping and collect taxes from their employees next year.

If you would like more information or details on the IRS guidance or how to temporarily defer payroll taxes for your employees, we’re here to answer your questions. Contact us today.