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Issues Raised by the Payroll Tax Deferral

By Tom Ochsenschlager, J.D., CPA

On Aug. 28, 2020, the IRS issued Notice 2020-65 in accordance with an Aug. 8 Presidential Memorandum directing the Treasury Secretary to use his authority to allow employees to defer certain payroll tax obligations.

In general, the notice “postpones” the due date for withholding and depositing the employees’ share of Social Security tax, generally 6.2%, for compensation beginning Sept. 1, 2020 through Dec. 31, 2020.

Determining Eligible Employees

The effective dates apply to the “pay dates” rather than the dates the services are provided. The delay is only available where the employee’s compensation is less than $4,000 for a biweekly (or equivalent) pay period. The notice does not explain how to compute the limitation if the pay period is not biweekly.

Possible Election Out of Program

It appears that employers can elect out of the deferral given that the notice refers to IRC Section 7805A and the COVID-19 emergency declaration refers to the voluntary deferral of tax payments. However, there is no guidance on how to make such an election.

Many employers might not have already adjusted their payroll function by the beginning of September. Given that it appears participation by an employer is voluntary, it seems the employer can begin to participate at any time prior to the close of the 2020 year and hopefully the IRS will provide some guidance to permit the implementation of the program retroactively back to the beginning of September. 

Employer Liability

Of course, the employees would need to pay these back taxes in 2021 and the employers would need to deposit them accordingly. The notice requires the employer to “withhold and pay” the deferred taxes “ratably” from the employee’s wages between Jan. 1, 2021 and April 30, 2021. It is unclear how this could be accomplished if the individual is no longer an employee. It is clear the employer is legally obligated to pay the deferred withholding amounts if the former employee does not pay them. The notice addresses this potential issue by merely stating the employer should “make arrangements to otherwise collect” the deferred amount. In circumstances where employers experience significant turnover of employees, the employer might address this issue by electing out of the program altogether.

TXCPA’s Federal Tax Policy Committee submitted a letter to the IRS and Treasury expressing their particular concern that the notice places a potential monetary liability on employers to collect and remit their employees’ tax obligation several months in arrears. The committee asked that the notice be reversed and clarified.

https://www.whitehouse.gov/presidential-actions/memorandum-deferring-payroll-tax-obligations-light-ongoing-covid-19-disaster/

https://www.irs.gov/pub/irs-drop/n-20-65.pdf

https://www.tscpa.org/docs/default-source/comment-letters/federal-tax-policy/2020/payroll-tax-deferral-obligations-comment-letter.pdf?sfvrsn=3a54ddb1_4

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