Guidance and Considerations for Implementation of Employee Payroll Tax Deferral

IRS Newswire, Issue IR-2020-195:

The Department of Treasury and Internal Revenue Service issued guidance implementing the Presidential Memorandum issued on Aug. 8, 2020, allowing employers to defer withholding and payment of the employees’ 6.2% Social Security tax if the employee's wages are below a certain amount. The memo directed the Treasury to explore avenues such as legislation to eliminate the obligation to pay the deferred taxes.

Notice 2020-65, posted on IRS.gov, makes relief available for employers and generally applies to wages paid starting Sept. 1, 2020, through Dec. 31, 2020.

The employee Social Security tax deferral may apply to payments of taxable wages to an employee that are less than $4,000 during a bi-weekly pay period, with each pay period considered separately. No deferral is available for any payment to an employee of taxable wages of $4,000 or above for a bi-weekly pay period.

The notice postpones the time for employers to withhold and pay employee Social Security taxes.

Considerations for Employers

In a recent blog post, AICPA VP of Taxation Edward S. Karl, CPA, CGMA, noted that the guidance leaves many questions unanswered and provided some suggestions when considering the employee payroll tax deferral: “…the deferral is optional to employers, in the sense that the notice postpones the due date to withhold and pay the tax but doesn’t preclude earlier withholding and payment.” Additional considerations for employers include:

The cost of implementing the program now, and then again after December 31, 2020.
The implications of employees who may leave before the deferred tax is repaid.
Various implications for employees including the need to eventually double the 6.2% withholding to repay the tax after December 31, 2020, potential confusion and problems for employees due to consequences of take-home pay changes, etc.
The employer is responsible for the payment of the deferred amounts which, if not repaid by April 30, 2021, will be subject to interest and penalties.

The Treasury Secretary is directed by the memo to consider forgiveness for the deferred amounts, however, legislation required to instate that forgiveness will need to be passed by Congress. For now, employers should be having conversations with their advisors and employees about how to proceed with this development.

The AICPA sent a letter to the Treasury and IRS requesting additional clarification.