IRS Issues Guidance for Executive Order on Payroll Tax Deferral

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two employees working togethet on laptop and pen and pad. photo focuses on hands typing and writing with jar of pencils to left of centerOn August 8, 2020, President Trump issued an Executive Order (EO) that defers the payroll taxes of employees making less than $4,000 in a bi-weekly payroll (applicable for the period September 1, 2020 through December 31, 2020). As the EO indicated the IRS would be responsible for providing guidance to implement the payroll tax deferral, taxpayers and business owners were left with several unanswered questions.   

With September 1 approaching, the IRS finally released guidance on August 28 in the form of Notice 2020-65 to assist employers with this EO payroll tax deferral. The IRS answered several questions in this EO but was silent on others. Below is a recap of key selected items included in Notice 2020-65:

  • The Notice establishes several terms that are important in addressing this payroll tax deferral: “Affected Taxpayers,” “Applicable Wages,” and “Applicable Taxes.”
  • Employers that are required to withhold and pay the employee’s share of FICA tax are designated as “Affected Taxpayers” by the Notice.
  • The Notice further defines “Applicable Wages” as wages or compensation paid to an employee on a “pay date during the period September 1, 2020 and ending on December 31, 2020, but only if the amount of such wages or compensation paid for a bi-weekly pay period is less than the threshold amount of $4,000.” Please note that this applies to any pay date occurring on or after September 1, 2020.
  • The threshold amount of $4,000 is adjusted accordingly for other pay periods.
  • Further, wages or compensation include cash tips received by an employee.
  • A footnote in the Notice also indicates that any amounts excluded from wages or compensation are not included in determining the amount of Applicable Wages. This would include any reductions for health insurance or retirement plan contributions.
  • The Notice also provides that Applicable Wages are determined on a pay period-by-pay period basis. Thus, if an employee earns $3,000 in the first two-week pay period in September this year, and $6,000 in the following two-week pay period, only the $3,000 in wages/compensation paid in that first pay period would be treated as Applicable Wages for that employee and be entitled to the payroll tax deferral.
  • “Applicable Taxes” are determined as the Applicable Wages times the FICA tax rate of 6.2%.
  • For the amounts deferred under this Notice, the Affected Taxpayer must withhold and pay the Applicable Taxes from the wages/compensation paid during the period from January 1, 2021 through April 30, 2021.
  • The Notice states that interest, penalties, and additions to tax will accrue on any unpaid Applicable Taxes beginning on May 1, 2021.
  • Finally, the Notice indicates that “the Affected Taxpayer may make arrangements to otherwise collect the total Applicable Taxes from the employee.” Thus, the Applicable Taxpayer (the employer) would withhold the Applicable Taxes from the employee’s wage or compensation paid from January 1, 2021 through April 30, 2021 to pay in the taxes that were deferred for the period September 1, 2020 through December 31, 2020.
  • However, if the employer does not withhold this amount from the employee beginning on January 1, 2021, the employer is still responsible to pay the Applicable Taxes on behalf of the employee.
  • Further, if an employee has Applicable Wages and deferred Applicable Taxes from September 1, 2020 through December 31, 2020, and then is no longer employed by the Applicable Taxpayer (employer), say in 2021, the Applicable Taxpayer must still pay the Applicable Taxes for this employee. It is uncertain whether the employer can recoup these Applicable Taxes from the employee.

While Notice 2020-65 offered some guidance and direction for employers, there remains several questions regarding this payroll tax deferral program:

  • The Notice does not cover self-employed workers, only employees, but questions have surfaced about whether self-employed workers would be included in this program.
  • The Notice did not offer guidance on how to opt out of the program. Thus, if an employer or employee does not want to participate in this payroll tax deferral, how do they elect out?
  • On August 12, 2020 (shortly after the EO was issued), Treasury Secretary Steve Mnuchin stated, “We can’t force people to participate, but I think many small businesses will and pass on the benefits.” This comment opened the door for employers or employees to not be part of the program, but the Notice did not address how this is done.
  • The Notice states that “for further information regarding the guidance in this Notice, please call the Notice 2020-65 Hotline at 202-317-5436.” This hotline is a good place to start with any questions you may have on the payroll deferral program, whether it is the mechanics of opting out or other inquiries. I called this hotline today to inquire about any opt-out guidelines or procedures but did not get through and left a message with my question.
  • Lastly, the IRS may release other guidance as this payroll tax deferral program unfolds, which we will continue to monitor.

There has been some criticism by various employers and business groups since the EO was unveiled, as to whether this payroll tax deferral is a feasible and viable program. There seems to be uncertainties about this program, and it places a burden on employers to implement on such short notice. Nonetheless, there still is a benefit to employees with this payroll tax deferral—even if only a short-term deferral—and some large federal government agencies announced they would be part of the program.

Takeaways

The Executive Order on payroll tax deferral was a surprise when it was released on August 8 after negotiations for the next COVID-19 stimulus package faltered. Employees can benefit in the short run but will be responsible to give back this benefit next year. Employers are caught in the middle of wanting to offer an incentive to their employees, while wondering if it is worth the extra work. Additional IRS guidance may be issued to ease some of the uncertainty with the program, which we will keep you posted on. Please contact your Sikich advisor with any questions.

This publication contains general information only and Sikich is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or any other professional advice or services. This publication is not a substitute for such professional advice or services, nor should you use it as a basis for any decision, action or omission that may affect you or your business. Before making any decision, taking any action or omitting an action that may affect you or your business, you should consult a qualified professional advisor. You acknowledge that Sikich shall not be responsible for any loss sustained by you or any person who relies on this publication.

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