Guidance on Payroll Tax Deferral Implementation
Employers and employees alike have questions regarding the payroll tax deferral recently enacted by President Trump. Below are the answers to the most common questions we've received.
How is eligibility for deferral determined?
What payroll taxes may be deferred?
- Payroll tax deferral is available to employees who have wages and compensation of less than $4,000 in a given biweekly payroll period during the September 1 to December 31 deferral period, or an equivalent amount for other payroll periods. This translates to anyone making less than $104,000 per year.
- For this purpose, wages are equal to Form W-2, Box 3 wages, i.e., wages subject to FICA taxes, which includes elective deferrals to 401(k) plans. As a result, an employee with variable pay (e.g., commissions, overtime, or a bonus) could be eligible for deferral in one payroll period in which he or she has less than $4,000 of pay, but not eligible in the next payroll period.
Are employers required to defer withholding employee payroll taxes?
- Employers can defer the withholding, deposit, and payment of the employee portions of the Old Age, Survivors, and Disability Insurance segment of the FICA taxes, i.e., the 6.2% tax on employee wages. The deferral applies to taxes on wages paid from September 1, 2020 through December 31, 2020. It is important to note that the payroll taxes are deferred, not forgiven.
How are the deferred taxes paid?
- The Notice provided by the IRS does not directly state whether the payroll tax deferral is optional for employers. However, based on the authority on which the guidance relies, it appears that employers can choose whether to implement the deferral.
Why would a company choose to opt-out of the deferral?
- The Notice provides that employers must withhold and pay any deferred payroll taxes from employee wages and compensation paid from January 1, 2021, through April 30, 2021, on a ratable basis. The notice also states that “if necessary, employers can make arrangements to otherwise collect the deferred taxes." If any deferred payroll taxes are not repaid by April 30, interest, penalties, and additions to tax will begin to accrue May 1.
- The complexity of implementing a payroll tax deferral on short notice
- The possibility of “saddling” employees with additional tax liability in 2021 (doubled up withholding in the Recovery Period)
- Risking the transition of liability to the employer. The Treasury’s guidance puts the responsibility on employers to pay back deferred taxes, many may not want to take on the additional risk of doing so
The Notice states that “for further information regarding the guidance in this Notice, please call the Notice 2020-65 Hotline at 202-317-5436
.” This hotline is a good place to start with any questions you may have on the payroll deferral program.