Payroll Tax Deferral Guidance Issued by IRS

Posted on: 10/12/20 by Heather D. Patten, CPA

To assist companies and workers seeking financial relief due to COVID-19, President Trump issued an Executive Order to permit companies to defer the withholding, deposit and payment of certain employee payroll taxes. The IRS issued Notice 2020-25 to provide employers with initial guidance on this payroll tax “holiday” that extends from September 1 through December 31, 2020. IRC Section 7508A enables the Treasury Secretary to use his authority to defer the payment of taxes when a federal disaster is declared.

Guidance Highlights

  • The Internal Revenue Code (IRC) defines “applicable wages” as wages or compensation paid to an employee on a pay date during this deferral period and totaling less than $4,000 for a biweekly period. The Notice does not include compensation from FICA and Medicare wages or Railroad Retirement Transportation and Medicare wages to meet the $4,000 threshold.
  • Companies eligible for this relief are those required to withhold and pay the employee share of Social Security tax or the railroad retirement equivalent. The Notice states that the obligation for these employee taxes does not occur until the tax is withheld, so no deposit obligation exists during this deferral period.
  • The due date for both the withholding and the payment of applicable wages is postponed until the period of January 1 through April 30, 2021.
  • After January 1, 2021, the deferred payroll taxes will be due along with the normal payroll taxes to be collected during that period. If the deferred taxes are not paid at this time, interest, penalties and additions will begin to accrue on May 1, 2021 on unpaid applicable taxes.
  • The Notice allows that the employer can make arrangements to otherwise collect the total applicable taxes from the employee.

IRS Notice Leaves Questions for Employers

The IRS notice is brief and it raises several practical questions with employers and business groups:

  • The guidance was issued just days before its effective date and to enact it, many companies needed more lead time to implement changes to their payroll system.
  • The rule appears to be elective and some employers have decided not to follow it.
  • Employers and business organizations such as the U.S. Chamber of Commerce have noted that the deferral will create a large tax obligation on covered employees during the first four months of 2021. Their payroll tax deductions will essentially double during that period.
  • No guidance is provided for tax liability in situations where an employee leaves the company during the deferral period or if net funds payable to the employee are insufficient to collect the additional withholding tax in the first part of 2021.

Companies should remain alert for further guidance that addresses these open questions about the payroll tax deferral program. For those companies that decide to defer employee Social Security withholding, the IRS has issued a revised Form 941 for reporting purposes.

Contact your Marvin and Company, P.C. representative with any questions.

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