IRS Issues Payroll Tax Deferral Guidance for Employers

On August 8, 2020, the President, via a Presidential Memorandum, directed the Secretary of the Treasury to use his authority pursuant to Code Sec. 7508A, in light of the COVID-19 emergency, to defer the withholding, deposit, and payment of certain payroll tax obligations. Recently, the IRS has provided much-anticipated guidance to employers regarding the recent presidential directive to allow them to defer the withholding, deposit, and payment of certain payroll tax obligations. Reuters goes on to clarify and explain what this means for employers:

The Secretary has determined that employers that are required to withhold and pay the employee share of social security tax under Code Sec. 3102(a) or the railroad retirement tax equivalent under Code Sec. 3202(a) are affected by the COVID-19 emergency for purposes of the relief described in the Presidential Memorandum and this Notice (Affected Taxpayers). (Notice 2020-65, 2020-38 IRB 1)

For Affected Taxpayers, the due date for the withholding and payment of the social security tax, and so much of the railroad retirement tax equivalent tax as is attributable to the rate in effect under Code Sec. 3101(a), on Applicable Wages, defined below, (collectively Applicable Taxes) is postponed until the period discussed below.

If an employer decides to follow this Notice, there is no indication whether individual employees can ask to opt out, i.e., have their Applicable Taxes withheld and paid over when their Applicable Wages are actually paid.

For purposes of the Notice, Applicable Wages means wages as defined in Code Sec. 3121(a) or compensation as defined in Code Sec. 3231(e) paid to an employee on a pay date during the period beginning on 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, or the equivalent threshold amount with respect to other pay periods.

The determination of Applicable Wages is made on a pay-period-by-pay-period basis. If the amount of wages or compensation payable to an employee for a pay period is less than the corresponding pay period threshold amount, then that amount is considered Applicable Wages for the pay period, and the relief provided in the Notice applies to those wages or that compensation paid to that employee for that pay period, irrespective of the amount of wages or compensation paid to the employee for other pay periods.

An Affected Taxpayer must withhold and pay the total Applicable Taxes that the Affected Taxpayer deferred under the Notice ratably from wages and compensation paid between January 1, 2021 and April 30, 2021 or interest, penalties, and additions to tax will begin to accrue on May 1, 2021, with respect to any unpaid Applicable Taxes. If necessary, the Affected Taxpayer may make arrangements to otherwise collect the total Applicable Taxes from the employee.

The Notice does not define what is “necessary” nor does it provide any more information as to what “arrangements” the Affected Taxpayer may make. Presumably, the “if necessary” rule covers a situation where the Affected Taxpayer deferred paying over Affected Taxes of an employee and then the employee leaves the Affected Taxpayer’s employment anytime before April 30, 2021.”