Payroll Tax Deferral – Updates Based on Current Guidance
by Tamara Hastings, PHR
[Updated 9/2/2020] On August 28, 2020, the Department of Treasury and Internal Revenue Service issued much awaited guidance regarding the Presidential Executive Order, effective on September 1, 2020, allowing for the deferral of withholding and payment of the employee’s portion of the Social Security tax. While the guidelines do provide some clarification, many questions still remain regarding the practical implementation and administration of the Order.
The updated guidance addresses and provides clarification for the following:
- Applicable deferral wages are capped at $4,000 taxable (not gross) Social Security wages on a per bi-weekly payroll basis. Of course, this cap will need to be adjusted for different payroll frequencies if an employer does not process bi-weekly and the guidance clarified that this cap is assessed each payroll, irrespective of annualized wage amounts.
- The “Applicable Taxpayer” related to the deferral is clearly defined as the Employer. Repayment of the deferred taxes will be the responsibility of the employer to withhold via payroll to return to the IRS during Q1 2021, although they “may make other arrangements to otherwise collect the total applicable taxes from the employee.”
- Payroll withholding is the only obligation being deferred. Deposits will still be due once withheld, meaning that employers cannot withhold the Social Security tax and hold onto it in hopes that the tax will be forgiven in 2021 for them to pay back out to employees.
While the new guidance does shed some light on several pressing issues with the Order, there still remain a host of unanswered questions and concerns with implementation of the payroll tax deferral. For example, accurate execution of many order details will require technical changes to payroll software platforms, for which software providers are still working with IRS and awaiting answers to critical questions before moving forward with changes. Additionally, the administration of, essentially, hundreds of small employee loans to the IRS is a daunting prospect for most employers who are still unsure what the recordkeeping and compliance requirements would be to implement.
Overall, there is still no concrete agency answer on whether deferral is even required by either party. Employers will need to carefully weigh the administrative costs and financial risks before deciding if/how they want to proceed. If employers choose to participate, since they will be the liable taxpayer for repayment of deferred taxes, they should be very clear on how they would handle withholding and repayment for employees who leave employment or those who no longer earn enough to repay the deferred taxes within the 2021 repayment window.
Abdo, Eick and Meyers will continue to monitor the Executive Order updates for continued guidance. If you have questions about participation in the Order or weighing the benefits and risks for your organization, we are here to help. Reach out to us here!
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