Employee Payroll Tax Deferral: Should You or Shouldn’t You?

On Friday, August 28, the IRS issued Notice 2020-65 for employers to provide guidance regarding the August 8 employee payroll tax deferral Executive Memorandum from President Trump, but questions remain.

Below are the key points from the three page guidance:

• The employee tax deferral period begins September 1, 2020 and ends December 31, 2020.
• The employee tax deferrals only apply to employees whose wages or compensation paid is less than $4,000 for any bi-weekly pay period. An equivalent amount must be calculated for payroll periods other than bi-weekly. It is important to note that the $4,000 threshold is considered with respect to each pay period during the deferral period. As a result, an employee whose wages are below the threshold in one pay period may have Social Security taxes deferred while wages paid in a separate period totaling $4,000 or higher will be unable to defer payroll taxes.
• The deferred payroll taxes must be withheld and remitted ratably during the period beginning January 1, 2021 and ending April 30, 2021 or interest, penalties, and additions to tax will begin to accrue on May 1, 2021. Employers are responsible for remitting these deferred employee payroll taxes. The notice indicates that if employees’ wages are not sufficient that the employer may make arrangements to otherwise collect the taxes from the employee, but specific guidance on this matter was not provided. Employers will need to consider state law surrounding employee compensation before pursuing payments from employees.

While not explicitly stated in the original memorandum or Notice 2020-65, each employer’s decision to implement this directive appears to be voluntary, but based on the authority on which the guidance relies, it appears that employers can choose whether to implement the deferral.

As payroll service providers and developers scramble to prepare software revisions necessary to calculate and track the employee payroll tax deferrals outlined above, employers will need to carefully consider the exposure they may face in choosing whether to follow this directive or not.

Still uncertain is whether any deferred payroll liability will be forgiven. In the event that Congress does not forgive the employee payroll taxes that have been deferred, employers will bear the burden of tracking and ultimately remitting the deferred payroll taxes and face penalties and interest should they fail to do so.

There are many questions that are left unanswered. Additional guidance is needed from the IRS and Treasury to clarify numerous questions and possible scenarios, such as the following:

• What happens when employees who have had payroll taxes deferred are no longer with the employer? Assuming that the employer has an obligation to pay the payroll tax obligation on behalf of the ex-employee, doing so would generally result in compensation to the ex-employee and additional payroll tax.
• If Congress ultimately acts to forgive the employee payroll taxes that have been deferred, will employers have the ability to revisit payroll tax filings for the periods where employee payroll taxes were not originally deferred?
• How will deferred employee payroll taxes be tracked on quarterly payroll tax returns and W-2s?

Given that this directive, as it now stands, only provides temporary relief to employees in the form of a payroll tax deferral, it’s important to evaluate whether the repayment of taxes ratably over the first four months of 2021 will create a greater hardship for employees than the benefit of increasing their cash flow over the last four months of 2020 from tax deferrals. This is of particular concern to employers with seasonal businesses that may pay higher wages to employees in the fourth quarter than in the first quarter of a given year.

In conclusion, employers will need to carefully consider whether the intended benefit to employees in implementing this directive outweighs the employer’s administrative burden and exposure to payroll tax liabilities.