IRS Guidance on Employee Payroll Tax Deferral

The attempts by Congress to negotiate another round of Coronavirus relief for individuals, businesses, and local government agencies have failed to move forward. The inability to come to an agreement left many relying on expected relief frustrated and concerned about the future. On August 8, 2020, President Trump issued four executive orders designed to provide limited relief including one which provides for the deferral of employee payroll taxes. The change was designed to allow those facing financial challenges to receive a small boost through bi-weekly paychecks. Although the Order called for deferral to begin starting September 1^st, 2020, Atlanta businesses have been unable to make necessary changes because of a lack of guidance from the IRS. The good news is guidance was finally issued late on Friday, August 28^th, providing the information needed to implement the program. It includes specific details on Applicable Wages, Affected Taxpayers, and the period when tax repayment must occur. To help clients, prospects, and others, Wilson Lewis has provided a summary of the key points below.  

Applicable Wages

As highlighted in the Executive Order, an employer may defer the employee portion of payroll taxes between the period of September 1, 2020, and December 31, 2020. The deferral applies only to the 6.2% Social Security tax withheld as part of the Federal Insurance Contributions Act (FICA) withholding. The 1.45% Medicare tax is excluded from this program.

The guidance clarifies that pre-tax compensation and wages paid for a bi-weekly pay period threshold amount of $4,000 ($104,000 annualized) qualify as Applicable Wages. In cases where the pay period duration differs, then the equivalent amount must be met. Wages and compensation that exceed this amount are ineligible. In addition, the determination of Applicable Wages is made on a pay period by pay period basis. This means an employee may have Applicable Wages for one pay period and not the next if the threshold is exceeded.

Tax Repayment

Payroll taxes that are deferred must be repaid paid between January 1, 2021, and April 30, 2021, otherwise, interest, penalties, and additions to the amount owed will begin to accrue on May 1, 2021. This means that employers that participate in the program will be required to withhold larger amounts from each employee paycheck at the beginning of the year.

Employer Liability

There is an important term used in the guidance which Atlanta businesses should carefully note. The term Affected Taxpayer in the guidance refers to the employer and not the employee. In other words, it is the responsibility of the employer to withhold, collect, and repay the deferred amount to the IRS during the above-mentioned period. This has created significant concern for many because the guidance did not provide any information on what will happen if the employee leaves the company or fails to generate enough income to pay outstanding taxes before April 30, 2021.

Contact Us

The guidance does provide important details about the program but leaves many questions unanswered. Given it will be the employer’s responsibility to withhold and pay deferred payroll taxes it is uncertain how many businesses will elect to participate. If you have questions about the information outlined above or need assistance with a tax or accounting issue, Wilson Lewis can help. For additional information call us at 770-476-1004 or click here to contact us. We look forward to speaking with you soon.