IRS Issues Guidance on Presidential Memo Deferring Payroll Taxes
The IRS and Treasury Department issued Notice 2020-65 providing guidance on the employee payroll tax deferral contained in President Trump’s August 8 memorandum. Under this memo, the Secretary of the Treasury was directed to postpone the collection of the employee portion of the 6.2% Social Security tax for the period of September 1, 2020, through December 31, 2020.
According to Notice 2020-65, employees that earn less than $4,000 during a bi-weekly pay period (or the equivalent threshold amount with respect to other pay periods) are eligible for this deferral. It should be noted that this is a deferral of the tax, not a payroll tax cut. The deferred tax must be repaid by April 30, 2021. That means the deferred (uncollected) tax must be withheld from the employees’ wages ratably during January to April 30, 2021.
There are several items to consider regarding the impact of Notice 2020-65. While the list below is not exhaustive, it does illustrate that careful consideration is required.
- Notice 2020-65 provides that implementation by an employer is optional and is not required. The notice is silent regarding employee choice.
- If an employer implements the deferral, the employer and the employee will have to agree upon a repayment method if the employee is no longer employed during the tax repayment period of January 1, 2021, through April 30, 2021.
- Notice 2020-65 provides for a four-month deferral – not forgiveness – so the benefit to the employee, absent further legislation, is the time value of money. This is a critical aspect that must be communicated to and understood by eligible employees.
- For employers that implement the deferral, employees need to be aware of the additional payroll tax deductions that will start in January 2021 and run through April 30, 2021.
- From a practical standpoint, payroll systems will need to be adjusted to accommodate the deferral and subsequent collection of the tax.
- It is anticipated that Form 941 will need to be revised for the third and fourth quarters of 2020 as well as the first and second quarters of 2021 to properly report the deferral and repayment.
- Employers will be subject to penalties and interest if the deferred taxes are not paid by April 30, 2021.
If you have any questions regarding IRS Notice 2020-65, please contact Larry Rice, Joao Gomes, or Paul Buchman at RVG & Company.