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Employee Payroll Tax Deferral is Optional, IRS Confirms

Recent IRS guidance provides some explanation of how employers can defer withholding and remitting an employee’s share of Social Security tax when wages are below a certain amount. The guidance was issued to implement the presidential executive action signed in early August. The deferral applies to employees whose wages or compensation, payable during any biweekly pay period, generally are less than $4,000, or the equivalent amount with respect to other pay periods. Amounts can be deferred without penalties, interest or additions to the tax.

Significantly, the payroll tax deferral for employees is optional, the IRS confirmed Sept. 3, resolving ambiguity that had persisted since President Donald Trump’s announcement of the relief measure last month.  “Employers may, but are not required, to utilize the relief,” Kelly Morrison-Lee, an attorney with the Internal Revenue Service, said during the agency’s monthly payroll industry teleconference.

Private employers still have questions and concerns about whether, and how, to implement the optional deferral. The President’s action only defers the employee’s share of Social Security taxes; it doesn’t forgive them, meaning employees will still have to pay the taxes later unless Congress acts to eliminate the liability.

NOTE: Under the CARES Act, employers can already defer paying their portion of Social Security taxes through December 31, 2020. All 2020 deferred amounts are due in two equal installments — one at the end of 2021 and the other at the end of 2022.

New guidance

The IRS on Aug. 28 issued guidance on the tax deferral plan, but questions remained over numerous issues, including whether employees could have a say in opting in or out.

  • The deferral enables the employee portion of Social Security tax assessed on compensation paid to employees from Sept. 1 to Dec. 31, 2020—which employers normally would withhold from the compensation and then pay to the governmentto instead be withheld and paid to the government from Jan. 1 to April 30, 2021.
  •  Employers, and not employees, have the controlling choice of whether to implement this payroll tax deferral, Morrison-Lee said.
  •  An employer would not be obligated to implement the deferral if employees want their portion of Social Security tax to be deferred.

The guidance states that “if necessary,” the employer “may make arrangements to collect the total applicable taxes” from an employee. This appears to answer one question that employers have about what happens if an employee leaves a job later this year or before the deferred taxes are due. However, no additional details are given on how an employer should make arrangements to collect unpaid tax.

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.

Going forward

There are still unanswered questions about the payroll tax deferral. If you need assistance or have questions about how to proceed at your business, contact Warady & Davis LLP at 847-267-9600 or info@waradydavis.com.  We can help you evaluate whether to participate and how to go forward.

SOURCE: IRS and Bloomberg Tax 

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