Late Friday, August 28, the IRS issued much-anticipated guidance on the payroll tax deferral that was ordered by President Trump in a presidential memorandum on August 8 (Notice 2020-65). The notice allows employers to defer withholding on affected employees’ compensation during the last four months of 2020 and then withhold those deferred amounts during the first four months of 2021.
As reported by the Journal of Accountancy, employers can defer the withholding, deposit, and payment of certain payroll taxes on wages paid from September 1 through December 31, 2020. The deferral applies to the employee portion of the old-age, survivors, and disability insurance (OASDI) tax under Sec. 3101(a) and Railroad Retirement Act Tier 1 tax under Sec. 3201. The due date for withholding and payment of these taxes is postponed until the period beginning January 1, 2021, and ending April 30, 2021.
The deferral applies to any employee whose pretax wages or compensation during any biweekly pay period is less than $4,000. The notice defines applicable wages, for these purposes, as:
- wages as defined in [Sec.] 3121(a) or compensation as defined in [Sec.] 3231(e) 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 such wages or compensation paid for a bi-weekly pay period is less than the threshold amount of $4,000, or the equivalent threshold amount with respect to other pay periods.
- Amounts excluded from wages or compensation under Secs. 3121(a) or 3231(e) are not included when determining applicable wages.
Under the notice, the determination of applicable wages is to be made on a pay-period-by-pay-period basis — meaning that if the amount of compensation payable to an employee for a particular pay period is less than the threshold amount ($4,000 for biweekly pay periods), then the payroll tax deferral applies to that compensation, irrespective of the amount paid to that employee in other pay periods.
The notice requires affected employers to withhold and pay the deferred taxes from wages and compensation paid during the period between January 1, 2021, and April 30, 2021. Interest, penalties, and additions to tax will begin to accrue on unpaid taxes starting May 1, 2021. The notice says that, if it is necessary, employers can “make arrangements to otherwise collect the total Applicable Taxes from the employee” but does not provide details on that requirement.
Two big questions that remain unanswered are:
- Is the deferral mandatory? Absent further guidance, it appears to be voluntary.
- Who is ultimately responsible for paying the deferred payroll taxes, particularly in a situation where the employee relationship is terminated prior to January 1, 2021?
The AICPA, in a letter sent to Treasury on August 12, has requested guidance on these and other related issues.