Payroll Tax Deferral Guidelines Issued - Questions Remain

The U.S. Department of Treasury and Internal Revenue Service (IRS) issued guidelines to President Trump’s recent payroll tax deferral executive order calling for a deferral of employees’ portion of the Social Security payroll tax from September 1 through December 31, 2020.

The executive order applies to the 6.2% Social Security payroll tax normally deducted from an employee’s pay and would affect workers whose biweekly pay is less than $4,000 on a pretax basis. Employers are responsible for withholding and paying any deferred taxes. Specifically, employers “must withhold and pay the total Applicable Taxes that the [employer] 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.”

The guidelines are available at: https://www.irs.gov/pub/irs-drop/n-20-65.pdf

According to the U.S. Chamber of Commerce, the guidance leaves several questions unanswered, such as:

Is the payroll tax deferral voluntary for the employer or employee? The notice makes clear that the employer is the affected taxpayer. While the notice does not explicitly say it is voluntary for the employer, it also does not make it mandatory. The notice makes no mention of nor seems to contemplate the employee making the election to defer. Therefore, this would appear to be a decision left to the employer. What happens if an employee no longer works for an employer once the deferral is over?

Is the employer responsible for the unpaid taxes? The notice implies that the employer is responsible for the deferred taxes but provides that the deferred taxes are to be withheld from employees beginning in January. The notice goes on to state, “If necessary, the [employer] may make arrangements to otherwise collect the total Applicable Taxes from the employee.” But the notice provides no further guidance as to what this might mean. It also provides no guidance on what happens if the person is no longer an employee and the employer is unable to collect the unpaid taxes.

Must an employer decide by September 1 whether to defer withholding or not? The notice is silent on whether an employer must defer the withholding for the entire deferral period (September 1 to December 31) or whether an employer can start deferring at any point during the deferral period.