July 26, 2022

Update on Payroll Tax Deferral

Limited Guidance Issued on the Payroll Tax Deferral Beginning September 1, 2020

On August 8, 2020, President Trump issued a Presidential Memorandum directing the Secretary of the Treasury to defer the withholding, deposit, and payment of the employee portion of the social security tax. It is important to note that the law (section 7508A of the Internal Revenue Code) only allows the President the authority to defer collecting a tax, but the law does not allow the President the authority to forgive the deferred tax. In order for forgiveness to occur, Congress would have to enact legislation.

Shortly after the Presidential Memorandum was signed, Treasury Secretary Steven Mnuchin, made statements that this would be a voluntary act by employers. The employer, according to statements made, would have the choice as to whether to participate in the tax deferral. Many employers have expressed concern about the hardships that employees will face when the social security tax must be remitted, in addition to the social security tax that will also be due at that time. Not to mention the concerns that came out when the Notice from the IRS was released on Friday evening giving very limited direction. It is also important to note that this option for employers to choose whether or not they will participate was not included in the Notice; however, employers should be aware that there are no penalties for continuing to withhold the employee portion of the tax subject to deferral.

The Notice, as we already knew, postpones employee portions of the social security deposits "until the period beginning on January 1, 2021, and ending on April 30, 2021." This does not affect the employer portion of the social security tax, which must still be remitted.

The Notice also confirms that this will only be applicable to employees whose gross wages “or compensation during any biweekly pay period generally are less than $4,000 …or the equivalent amount with respect to other pay cycles.” This language will require employers to make the determination as to the employee’s qualification for the deferral each pay cycle, if the employee’s wages fluctuate.

Another area of concern is how the Notice defines “Affected Taxpayers,” which is not as employees, but as employers. The Notice states that "An Affected Taxpayer must withhold and pay the total Applicable Taxes that the Affected Taxpayer deferred under this notice ratably from wages and compensation paid between January 1, 2021 and April 30, 2021 or interest, penalties, and additions to tax will begin to accrue on May 1, 2021, with respect to any unpaid Applicable Taxes." There are many unofficial interpretations of this section, but the most concerning from an employer’s perspective is that the employer must recover those taxes from employees over a period of a few months, or the employer, as the affected taxpayer, is on the hook for interest, penalties, and additions to tax.

That brings up many more questions and according to the Notice if the employee does not want to pay it back, does not make enough money to cover the tax, or leaves the employer, it does not matter. The Notice specifically says the "Taxpayer may make arrangements to otherwise collect the total Applicable Taxes from the employee."

As indicated, there are many differing interpretations on this part of the Notice, so until we receive additional clarification, employers should consider the worst case scenario. It's also not evident how this will be reported for tax purposes, but likely, there will have to be an update to the Form 941. It remains to be seen as to whether or not Congress will enact legislation related to forgiveness of the tax.

With the deferral period beginning September 1, it does not seem possible that this will roll out on time, as employers need additional direction from the Treasury and the IRS. As soon as we have any related information or clarification, we will provide it. Employers relying on payroll companies to manage their payroll should check with those companies to see when any updates to the software may be available, as they will not be able to implement until final guidance has been provided.

One last consideration will be providing this information to employees. Cities need to let employees know that there is not enough information available to begin the deferral as directed. If employers determine that they will not be implementing the deferral, even after guidance has been received, they should also plan how they will communicate this to their employees. Either way, they should make sure it is clear to employees that come January 2021, unless something changes, the amount of tax deferred now will have to be paid no later than April 30.

For more information on this or any other personnel matter, contact Personnel Services Manager, Andrea Shindlebower Main.