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Treasury issues guidance on payroll tax holiday

The Treasury Department released guidance the evening of Friday, Aug. 28, 2020, on the “payroll tax holiday” provided by the Aug. 8, 2020, presidential memorandum. Notice 2020-65 requires the deferred taxes to be repaid ratably over the first four months of 2021, but provides virtually no answers to the many questions employers have been asking about the related compliance and other issues. Most importantly, it appears to leave employers responsible for collecting the taxes from employees in 2021 and implies they must recoup deferred liabilities from those employees who have departed prior to or during the collection period. Unfortunately, the notice offers no direction as to how this should be done.

Under the notice, the date by which employers must withhold and pay Social Security taxes for workers earning less than $4,000 per biweekly pay period is postponed. An equivalent threshold applies with respect to other pay periods; for example, employees receiving weekly paychecks would instead use a $2,000 threshold. Further, the determination of whether an employee is eligible is made on a pay-period-by-pay-period basis. In other words, if an employee earns $3,500 in a given pay period, the Social Security tax otherwise due on those wages could be deferred, despite the fact that same employee earned $5,000 in the previous pay period.

Payroll taxes that otherwise must be withheld and remitted to the government between Sept. 1, 2020, and Dec. 31, 2020, are now due between Jan. 1, 2021, and April 30, 2021. Interest, penalties or additions to tax will accrue on any unpaid amounts starting May 1, 2021.

Key considerations:

  • While the notice says the collection date is postponed, it does not appear to make the deferral mandatory. Accordingly, it seems employers can decide to continue collecting and remitting payroll taxes in the normal course of business. This would be consistent with Treasury Secretary Steven Mnuchin’s previous informal remarks.
  • It is apparently up to the employer to determine how soon to collect the deferred payroll taxes in 2021 so long as they are collected and remitted by April 30, 2021. While the IRS notice states that employers must withhold the deferred taxes from wages and compensation paid from January to April 2021, it adds that employers, “if necessary, “may make arrangements to otherwise collect” the taxes from employees. Presumably, this provision makes the employer responsible to come up with a method to recoup deferred taxes from any departing employees. Since there is no guarantee the employee’s share of deferred taxes will be forgiven, employers may not want that responsibility.
  • The notice does not address whether individual employees can opt out of the program. Consequently, the guidance means that employees may face a financial hardship in early 2021 due to the double withholding of the 6.2% Social Security — i.e., regular withholding on their 2021 wages and catch-up withholding for the deferred payroll taxes from the last four months of 2020.
  • If employers continue to withhold payroll taxes during the Sept. 1 to Dec. 31, 2020, period, the due date for remitting those amounts is not delayed or postponed. In other words, employers cannot continue to withhold taxes and utilize the deferral.
  • Reminder: not all employees qualify. The guidance provides the deferral for employees whose wages or compensation “payable during any bi-weekly pay period generally is less than $4,000, calculated on a pre-tax basis,” which equates to a $104,000 annual pre-tax salary. Employers must continue to withhold for employees earning above this threshold.

We urge employers to use caution before enacting this program due to the uncertainties that surround it.

Please contact your Baker Tilly tax advisor with questions on how the above affects your tax situation.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.