The IRS has provided guidance to employers regarding the recent presidential action to allow employers to defer the withholding, deposit and payment of certain payroll tax obligations. The three-page guidance in Notice 2020-65 was issued to implement President Trump’s executive memorandum signed on August 8.

Private employers still have questions and concerns about whether, and how, to implement the optional deferral, and many business groups have said their members are opting out of the tax deferral.

The President’s action only defers the employee’s share of Social Security taxes, also known as “payroll taxes.” It doesn’t forgive the taxes, meaning employees will still have to pay the taxes later unless Congress acts to eliminate the liability.

Deferral basics

President Trump directed the U.S. Secretary of the Treasury to use his authority under the tax code to defer the withholding, deposit and payment of the employee’s portion of payroll tax obligations between September 1 and December 31, 2020. (Employers already were able to defer paying their portion of Social Security taxes through the end of the year under the CARES Act.)

All 2020 deferred amounts are due in two equal installments — one at the end of 2021 and the other at the end of 2022. If Congress does not act to forgive the taxes, this means workers and employers will have to pay the deferred taxes over the next two years, on top of the taxes owed for those years.

Under the IRS guidance, “applicable wages” means wages or compensation paid to an employee on a pay date beginning September 1, 2020, and ending December 31, 2020, but only if the amount paid for a biweekly pay period is less than $4,000, or the equivalent amount with respect to other pay periods.

The guidance postpones the withholding and remittance of the employee share of Social Security tax until the period beginning on January 1, 2021 and ending on April 30, 2021. Penalties, interest and additions to tax will begin to accrue on May 1, 2021, for any unpaid taxes.

“If necessary,” the guidance states, an employer “may make arrangements to collect the total applicable taxes” from an employee. But it doesn’t specify how.

Many employers opting out

Several business groups have stated that their members won’t participate in the deferral. For example, the U.S. Chamber of Commerce and more than 30 trade associations sent a letter to members of Congress and the U.S. Department of the Treasury calling the deferral “unworkable.”

The Chamber is concerned that employees will get a temporary increase in their paychecks this year, followed by a decrease in take-home pay in early 2021. “Many of our members consider it unfair to employees to make a decision that would force a big tax bill on them next year… Therefore, many of our members will likely decline to implement deferral, choosing instead to continue to withhold and remit to the government the payroll taxes required by law,” the group explained.

Businesses are also worried about having to collect the taxes from employees who may quit or be terminated before April 30, 2021. And since some employees are asking questions about the deferral, many employers are also putting together communications to inform their staff members about whether they’re going to participate. If so, they’re informing employees what it will mean for next year’s paychecks.

How to proceed

Contact us if you have questions about the deferral and how to proceed at your business.