Wednesday, September 2, 2020

IRS Guidance Gives Scant Advice on Payroll Tax Relief; Phone Call Yields More

With the temporary deferral of most employees’ portion of the Social Security payroll tax set to begin yesterday, employers had been hoping for guidance from the Treasury Department on compliance, Late Friday, that guidance came, but some would say in true IRS fashion it is clear as mud.

To recap, President Trump issued an Executive Memorandum (not an Order) on August 8th which directed the Treasury Department to issue guidance fulfilling his intention to temporarily suspend the withholding of that portion of the Social Security payroll tax attributable to employees who earn less than $4,000 in a bi-weekly payroll period (roughly $104,000 annually). The obligation to pay the Social Security tax is not forgiven, just postponed until next year. 

This raised many questions, such as may the employer continue to withhold the tax and hold it for payment next year; may employees opt out of the deferral; what if an employee leaves employment between now and when the tax is due; is eligibility for the deferral determined on an individual payroll or annual basis. The guidance issued Friday provides a few definitive answers as follows:

1. The guidance states that "for Affected Taxpayers (employers) the due date for the withholding and payment of the postponed until the period beginning on January 1, 2021, and ending on April 30, 2021." This seems clear that employers must stop withholding the Social Security tax for eligible employees beginning tomorrow. In support of that theory, a footnote states that "[T]he deposit obligation for employee social security tax does not arise until the tax is withheld," which seems to indicate that the opposite would be true as well, so if tax is withheld from the employee’s pay, it must be deposited by the employer, which the employer is not supposed to do until January 1st.

2. On the other hand, at the end of the guidance it states that "If necessary, the Affected Taxpayer (employer) may make arrangements to otherwise collect the total Applicable Taxes from the employee." While this may provide a basis for employers to continue to withhold social security taxes from employees who would otherwise be eligible for the deferral, the interpretation may be a stretch. First of all, that sentence refers to the “total” taxes, indicating that the collection would be made once the taxes were actually due after January 1st. Secondly, this sentence appears in the guidance after explanation of when payment of the deferred tax is due, giving some credence to an argument that it may be referring to collection of the deferred tax when it becomes due, and does not give authority now to collect the tax.

3. The deferred tax payments will be due beginning on January 1, 2021, through April 30, 2021. (Although the guidance does not address this, many hope that this tax will be forgiven at some point by legislation.) Interest, penalties, and “additions to tax” begin to accrue as of May 1, 2021, on unpaid taxes.

4. Eligibility for the tax postponement is determined on a pay period by pay period basis so that if wages or compensation fall below the bi-weekly threshold amount of $4,000, the employee is eligible for relief for that pay period. The guidance says “[I]f the amount of wages or compensation payable to an employee for a pay period is less than the corresponding threshold amount, then…the relief provided in this notice applies…” Presumably, when an employer’s pay period is other than bi-weekly, they must determine whether the employee’s wages or compensation would meet the threshold if paid bi-weekly. This is especially important for the many employers who pay bi-monthly as opposed to bi-weekly. The test is whether the employee’s wages or compensation would be $4,000 on a bi-weekly basis.

The guidance is silent on how to address situations where the eligible employee has left employment between now and April 30, 2021, the last day to pay the deferred tax. While employers will pay their share of all employees’ social security tax payments between now and the end of the year, presumably any shortfall on the employee’s side of that tax payment will be the responsibility of the employee.

A telephone call to the IRS Hotline though yielded the answer to the most common question asked by employers. Implementation of the employee payroll tax deferral is optional for employers. While vague on the basis, agency representatives confirmed in several calls that their payroll tax deferral is not mandatory. So, unless you are an employer who decides to opt for this deferral (or are a federal government employer who, according to Trump, will begin this deferral program this month), you can stop trying to figure out how in the world you will implement this change by next pay period.

According to IRS representatives, the agency will issue FAQs next week which will further explain the basis for this conclusion as well as provide answers to other questions for employers who elect to defer the employee payroll tax withholding.