Deferring Employee Payroll Taxes
The U.S. Treasury and IRS have released the initial guidance, Notice 2020-25, to put into operation the President’s Executive Order, which allows deferring employee payroll taxes beginning on September 1, 2020. It’s important to note that this relief is intended for the employer, not the employee. The employer is the “affected taxpayer” in this Executive Order.
This Executive Order is for employers who are required to pay and withhold the employee’s share of Social Security tax or the railroad retirement equivalent. The employer deposit obligation on applicable wages is delayed until the tax is withheld from the employee. The due date for withholding and paying the payroll tax on “applicable wages” has been postponed. This is until the period beginning on January 1, 2021 and ends on April 30, 2021.
The Internal Revenue Code has defined applicable wages as wages or compensation that has been paid to an employee during the period from September 1, 2020 to December 31, 2020. These wages or compensation paid for a bi-weekly basis are less than $4,000. It’s determined on a period-by-pay basis; therefore, an employee may qualify for one pay period, but not another when wages are not paid equally. The $4,000 threshold does not include compensation from Railroad Retirement Transportation or FICA and Medicare wages.
If the employer has deferred the payroll tax, the employer is required to withhold and pay the tax from the wages or compensation paid to the employee between January 1, 2021 to April 30, 2021. If applicable taxes are unpaid by May 1, 2021, penalties, interest, and additions to the tax will start to accumulate.
There are many questions that have gone unanswered with the issuance of the Notice. The language of the Notice makes it seem like the deferral is elective; however, this matter is still unclear, and more guidance will be needed to decipher whether or not this Executive Order is mandatory or not. There are several issues that employers have concerns about, namely if the deferral will create large tax obligations for the employees in the first quarter of 2021 and what the employer’s liability will be if an employee resigns or if there aren’t enough net funds payable to the employee to collect the additional withholdings.
The IRS issued a revised Form 941 that includes lines to report the deferred employee tax. More instructions and guidelines are expected to be released soon to provide more clarity. If you should have any questions, feel free to contact us.