On August 8, 2020, President Trump issued a memorandum directing the Secretary of the Treasury to use his authority pursuant to Internal Revenue Code (“IRC”) Section 7508A to defer the withholding, deposit, and payment of the 6.2 percent tax imposed on employees’ wages under IRC Section 3101(a) (Old-Age, Survivors, and Disability Insurance) and IRC Section 3201 (Railroad Retirement Tax). The memorandum indicated that the deferral should be made with respect to an employee whose wages or compensation payable during any bi-weekly pay period generally is less than $4,000, calculated on a pre-tax basis. The memorandum provided that the Secretary of the Treasury shall issue guidance to implement the memorandum. On Friday, August 28, 2020, the Department of Treasury (“Treasury”) and the Internal Revenue Service (“IRS”) issued Notice 2020-65 (the “Notice”) as guidance with regard to the payroll tax deferral. This FGMK Tax Alert provides an overview of the newly released guidance.
Who does Notice affect?
The Notice defines “Affected Taxpayers” as those required to withhold and pay the 6.2 percent employee share of the social security tax or the railroad retirement tax.
What is the effect?
The Notice postpones the due date for the withholding and payment of such taxes. A footnote in the Notice clarifies that the deposit obligation does not arise until the tax is withheld. Therefore, since the Notice postpones the time for withholding the employee share of the tax, the deposit is delayed by operation of the regulations, and thus the Notice does not separately postpone the deposit obligation.
Does the Notice apply to all employees’ wages?
No, the Notice applies to wages or compensation paid during a specific period of time in the amount below a defined threshold amount. The Notice defines such wages as “Applicable Wages”.
What is the definition of Applicable Wages?
For purposes of the Notice, Applicable Wages means wages as defined in IRC 3121(a) and compensation as defined in IRC 3232(e) paid to an employee on a pay date during the period beginning on September 1, 2020 and ending on December 31, 2020.
Moreover, as in the President’s memo, the Notice restricts the deferral to wages or compensation paid for a bi-weekly pay period that are less than a threshold amount of $4,000, or the equivalent threshold amount to other pay periods.
What if an employee’s wage or compensation fluctuates each pay period?
The Notice confirms that the relief applies to wages or compensation paid to an employee for a specific pay period, irrespective of the amount of wages or compensation paid to the employee for any other pay periods. Therefore, the relief applies to any wages or compensation that meet the threshold amount for that pay period, even if an employee had wages or compensation exceeding the threshold amount during a different pay period.
Does the deferred amount need to be paid at a later date?
Yes, the relief is not a permanent waiver or forgiveness of the employee’s share of payroll tax. It merely provides a deferral and delays the withholding and payment until Q1 of 2021 (in addition to withholding applicable for wages or compensation paid during that period).
The Notice provides that the payroll taxes deferred during the September 1, 2020 through December 31, 2020 period are defined as Applicable Taxes. Such Applicable Taxes must be withheld and paid from wages or compensation paid between January 1, 2021 and April 30, 2021.
Interest, penalties, and additions to tax will begin to accrue on May 1, 2021 with respect to any unpaid Applicable Taxes.
Who bears the liability for the Applicable Taxes?
While the Notice does not explicitly state the employer is the responsible party, the wording of the Notice indicates that the employer, the Affected Taxpayer, is liable for all such Applicable Taxes.
The final line of the Notice, prior to the Drafting Information section, states, “If necessary, the Affected Taxpayer, may make arrangements to otherwise collect the total Applicable Taxes from the employee.” This final piece of guidance combined with the Notice’s assertion that interest, penalties, and additions to tax will begin to accrue on May 1, 2021, suggest that the government will look to the employer to pay the deferred amount.
The employer’s liability would be magnified in situations where an employee who benefits from the tax deferral subsequently departs the employer’s company prior to the employer “reclaiming” the deferred tax amount from the employee’s pay during the January 1, 2021 through April 30, 2021 time period. The guidance comment as to the employer’s ability to “make arrangements” suggest that the employer could reach an agreement with a departing employee or possibly withhold an amount from a final paycheck to cover the deferred tax liability.
What is the likelihood that the deferred amount is forgiven by the federal government?
Congress would have to pass legislation to make the deferral a permanent tax savings. Congressional leaders have repeatedly indicated a lack of support for a payroll tax deferral or forgiveness. Therefore, as of now, it is not likely that Congress will take any action to make the deferral a permanent tax savings.
Do employers and employees have to participate in the deferral opportunity provided by the Notice?
While neither the President’s memo nor the Notice suggest that the deferral relief is voluntary, Treasury Secretary Steve Mnuchin previously stated in an August 12, 2020 interview with FOX Business’ Maria Bartiromo, “We can’t force people to participate.”
Based on the Treasury Secretary’s statement during the television interview, it would appear that the program is voluntary. However, employers would be advised to contact their payroll providers to discuss.
Moreover, while the AICPA (see letter HERE) and others had requested guidance allowing employees to opt-out of the deferral, the guidance is silent as to employees’ ability to opt-out if an employer otherwise elects to apply the deferral.
What is the impact to employees?
The benefit is merely a matter of timing for employees as the deferred taxes will be withheld from the employees' wage or compensation at a later date. If an employee does not have the 6.2 percent tax withheld during the September 1, 2020 through December 31, 2020 period, the employee will have increased take-home pay. However, the employee will then experience a decrease in take-home pay during the January 1, 2021 through April 30, 2021 period as the deferred taxes are withheld and paid for the deferment period in addition to the 6.2 percent payroll tax assessed on wages or compensation paid during that period.
Employer pays employees on a bi-weekly basis. For the period of September 1, 2020 through December 31, 2020, Employer will have nine bi-weekly pay periods.
Employee A earns a bi-weekly wage of $3,999, the maximum threshold amount (if Employee A earned $4,000 or more during the bi-weekly period, the employee would not be eligible for deferral). For each bi-weekly pay period, Employee A would typically have $248 withheld from the $3,999 (in addition to other federal and tax withholdings) to pay the 6.2 percent employee share of the payroll tax.
If the employer and employee participate in the deferral opportunity provided by the Notice, Employee A will retain $248 for each of the nine bi-weekly pay periods from September 1, 2020 through December 31, 2020. As a result, Employee A will have received $2,232 ($248/pay period X 9 pay periods) that otherwise would have been withheld and paid to the federal government as the employee’s share of payroll taxes.
Employee A’s pay remains the same in 2021. During the period of January 1, 2021 through April 30, 2021, Employer will re-start the withholding of the 6.2 percent of the employee’s share of the payroll tax, $248, from each paycheck. Additionally, Employer will also withhold a portion of the deferred tax amount, $2,232, over the course of each bi-weekly pay period through April 30, 2021, until Employee A has repaid the deferred amount.
Will the Form 941 report such deferred tax amounts?
The IRS has released a draft of a revised Form 941, dated August 28, 2020 (available HERE). Line 24 on page 3 provides a line for the deferred amount of the employee share of social security taxes.
Does this only affect the employee’s share of the payroll tax?
Yes, the CARES Act previously provided employers with an option to defer the deposit and payment of the employer’s share of such taxes. Treasury and the IRS provided guidance in Notice 2020-22.
Employers would be advised to contact their payroll providers and discuss how payroll companies plan to implement the tax deferral. If an employer elects not to defer the taxes, it may want to communicate the fact that this program is simply a deferral, and that any deferred taxes will be withheld from employees’ pay during January 1, 2021 through April 30, 2021 in addition to the withholding from wages and compensation paid ruing that period.
The summary information in this document is being provided for education purposes only. Recipients may not rely on this summary other than for the purpose intended, and the contents should not be construed as accounting, tax, investment, or legal advice. We encourage any recipients to contact the authors for any inquiries regarding the contents. FGMK (and its related entities and partners) shall not be responsible for any loss incurred by any person that relies on this publication.
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