IRS issued guidance on payroll tax deferral
On August 8, 2020, President Trump issued a directive to allow for the deferral of payroll tax for certain workers. On August 28, 2020, the IRS issued Notice 2020-65 to provide more guidance on how to implement this payroll tax relief.
Under the guidance, employers are allowed to defer withholding, deposit, and payment of the employee’s 6.2% portion of Social Security tax on wages paid from September 1 through December 31, 2020. The employers must then withhold and pay the tax ratably from wages paid between January 1, 2021 and April 30, 2021.
The deferral can only apply to wages that are less than $4,000 during a bi-weekly pay period. Applicable wages are determined on a pay period-by-pay period basis and are irrespective of the amount paid to the employee for other pay periods.
The payroll deferral is only voluntary. Employers are not required to participate. Also, be aware that the relief only delays the withholding and payment of the tax, but does not exempt it. Deferred payroll tax not paid during the required period will be subject to interest and penalties starting on May 1, 2021.
The latest guidance still leaves many questions unanswered. It did not address whether the deferral will apply to the Social Security tax for self-employed individuals or if employees have any input in the deferral decision. Also, what will happen if the employee leaves the company or does not make enough compensation to pay the deferred tax? Although the guidance says the employers may make arrangements to collect the deferred tax, it did not provide further details.
Contact us if you have any questions regarding the deferral of payroll taxes.