09.02.2020 IRS Issues Guidance for Payroll Tax Deferral
President Donald Trump issued an Executive Order on August 8, 2020 allowing employers to defer withholding, depositing, and paying certain payroll tax obligations for their employees. On August 28, 2020, the Department of Treasury and the Internal Revenue Service issued guidance to employers who choose to implement the payroll tax deferral (the “Guidance”).
This Alert summarizes the key provisions of the Guidance. However, as noted below, deferring the employee’s share of payroll taxes creates several challenges for employers and their employees. Also, the Guidance leaves unanswered questions.
Deferral of Certain Payroll Taxes
- Deferral is available for the employee share of social security taxes or railroad fund equivalent. Deferral does not apply to the employer’s share of any payroll taxes.
- Deferral is available on wages and compensation paid to an employee on a pay date during the period beginning on September 1, 2020, and ending on December 31, 2020, but only if the amount of wages or compensation paid for a bi-weekly pay period is less than $4,000, with each pay period considered separately.
- No election is necessary to defer the employee’s share of payroll taxes. The Executive Order automatically extends the due date for withholding and payment of the taxes until the period beginning on January 1, 2021 and ending on April 30, 2021.
An employer must withhold and pay the applicable taxes that were deferred under the Executive Order ratably from wages and compensation between January 1, 2021 and April 30, 2021. If payment is not made, interest, penalties, and additions to tax will begin to accrue on May 1, 2021. If necessary, the Guidance notes that employers may make other arrangements to collect the taxes from the employee.
Open Questions and Challenges
- President Trump’s Executive Order simply defers the employer’s obligation to withhold and pay the employee’s share of payroll taxes. Although many employees will be excited to get a bump in pay this fall, they will pay for it by receiving a smaller paycheck beginning in January 2021.
- Employers are still obligated to remit the employee’s share of the payroll tax. This may create a hardship for many businesses if the employee quits, is terminated or laid off, or receives a pay cut.
- In normal circumstances, failure to pay the employee’s share of payroll taxes may result in personal liability for the employer’s officers and directors. Such taxes are deemed “trust fund taxes” that the employer holds in escrow for the government. It is uncertain how the government will treat the trust fund taxes if they are not paid by April 30, 2021.
Some employers may try to accommodate their employees by deferring the taxes. The Guidance does not provide information on whether an employer may defer payroll taxes for some employees and not others. Also, it does not provide whether employers may defer on some paychecks and not others.
Although deferring the employee’s share of payroll taxes may produce a short-term benefit to the employee in 2020, there are some obvious challenges that could make the deferral treacherous for the employer and the employee in 2021. Williams Mullen will continue to monitor any updates or guidance issued by the Department of Treasury or the Internal Revenue Service on this issue.