September 16, 2020
John H. Henderson
Member, Stoll Keenon Ogden PLLC
On August 8, 2020, President Trump directed the Secretary of the Treasury to use his authority under Internal Revenue Code Section 7508A to defer certain payroll tax obligations. The Secretary did so through Notice 2020-65, which was issued on Friday, August 28, and authorized employers to defer withholding, deposit, and payment of certain employee payroll taxes on wages or compensation paid during the final four months of the year (September 1, 2020, through December 31, 2020).
This payroll tax deferral applies to both Social Security taxes paid on income earned in the private sector and Railroad Retirement Act taxes paid on income earned by employees of railroad companies.
The payroll tax deferral is not mandatory. Rather, an employer may elect to defer the withholding. Employers who do not wish to take advantage of the relief, however, may continue to withhold and deposit payroll taxes on their regular schedule. But once an employer withholds taxes from employee pay, that employer must deposit the withheld taxes timely.
This optional payroll tax deferral appears to be solely at the discretion of the employer, not the employee. Under the Notice, employees do not have the option to elect payroll tax deferral or direct their employer to defer withholding.
The payroll tax deferral does not apply to all employees, nor does it apply to all payroll taxes. Payroll tax deferral may be made only for wages paid to employees who earn less than $4,000 every two weeks. Further, deferral may be made only for the Old-Age, Survivor’s and Disability Insurance (OASDI) portion of the payroll taxes, which is a 6.2% tax on employee wages. The Medical Insurance (MI) portion is not affected.
Once an employer has implemented the payroll tax deferral, the deferred taxes must be collected and paid to the Treasury during the four-month period running from January 1, 2021, through April 30, 2021. At that point, interest and penalties will begin to accrue on any then-unpaid OASDI or RRA taxes covered by the deferral order.
The deferral component of the Notice has the potential for problems. It may be difficult for an employer to collect deferred taxes from an employee who does not remain employed with the same employer between September 1, 2020, and April 30, 2021. To address those concerns, the Notice also provides that an employer “may make arrangements to otherwise collect” deferred payroll taxes not collected from an employee during the four-month deferral period.
If an employer chooses to defer collection and payment of payroll taxes, then that employer should make “arrangements” to collect the deferred taxes. One option would be to enter into written agreements with employees on the collection of the deferred taxes. Alternatively, an employer could merely notify employees that any deferred payroll tax withholdings will be withheld from any final paycheck and, if the final paycheck amount is not sufficient, the employee will be required to make a separate payment to the employer.
None of the President, the IRS, or the Treasury Department has the authority to forgive the deferred taxes. President Trump has stated that he would like Congress to enact legislation forgiving the deferred taxes. Whether that will occur is uncertain. If Congress takes no action, then the deferred taxes must be repaid.
Because of the potential pitfalls with deferring payroll taxes, employers should consider the risks and benefits of payroll tax deferral before deciding whether to elect to take advantage of the deferral.
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