Payroll Tax Deferral Guidance

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On Friday, August 28, 2020, the IRS released Notice 2020-65 to provide for the implementation of the Executive Order signed by President Trump on August 8, 2020, in response to the ongoing COVID-19 pandemic. The Executive Order instructed the Secretary of the Treasury to defer the withholding, deposit, and payment of employee Social Security taxes from September 1, 2020 through December 31, 2020 (Deferral Period) for certain employees. While the Notice itself does not expressly state the deferral is optional, the Secretary of the Treasury confirmed the deferral is voluntary and employers may choose to withhold and deposit payroll taxes as they would ordinarily.

The Notice provides that Social Security withholdings may be deferred for eligible wages paid to an employee during the Deferral Period. If an employee makes more than $4,000 in gross wages on a biweekly basis (or other equivalent amount) in any eligible pay period, the taxes cannot be deferred. This threshold must be applied on a pay-period by pay period basis, so an employee may qualify in one pay-period but not in others.

The Notice places responsibility on the employer for withholding and paying the taxes that the employer defers during the Deferral Period. Employers must withhold and pay any deferred Social Security taxes during payroll periods between January 1, 2021 and April 30, 2021 with penalties and interest accruing on any unpaid taxes after April 30, 2021. The Notice does allow the employer to make alternate arrangements with employees for payment of the deferred taxes, so the entire deferral may be withheld from a departing employee’s final paycheck if an employee is terminated before the taxes are fully repaid.

For employers, this deferral potentially presents significant recordkeeping and other administrative burdens. Employers should carefully consider the risks of making the deferral, including the possibility that an employee is terminated before the deferred taxes are collected. Please consult your HTB advisor for more information on the payroll tax deferral.