Paul Rozek CPA CFP headshot Paul Rozek, CPA, CFP

IRS issues guidance on Employee Payroll Tax Deferral

The economic challenges created by the COVID-19 pandemic have been felt by businesses and individuals across Chicago. Not only have unemployment numbers spiked to new highs, but the impact on economic output has been hit. It was reported by Crain’s Chicago Business that Illinois is expected to take a $76B reduction in economic output due to the pandemic. These numbers reflect the need for another federal stimulus package to help state, local government, and businesses manage.

Since Congress was unable to come to an agreement, earlier this month President Trump issued several Executive Orders. One of these was the creation of an employee payroll tax deferral program designed to provide individuals with immediate relief. Unfortunately, the lack of IRS guidance made it impossible for businesses to implement it for employees. On August 28, the IRS finally issued needed guidance (IRS Notice 2020-65) providing additional details on qualifying wages, repayment timeline, and other information. To help clients, prospects, and others, Selden Fox has provided a summary of the key details below.

Applicable Wages

As highlighted in the Executive Order, an employer may – but is not required to – 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. Therefore, the ability to participate may change on an ongoing basis.

Tax Repayment

Payroll taxes that are deferred must be repaid 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.

Employer Liability

An important term used in the guidance which businesses should carefully note is the way they address the “Affected Taxpayer”. In the guidance, the term refers to an employer and not an employee as the party making the deferral. The employer, while they can take into account the wishes of an employee, is ultimately the one making the election to take advantage of the deferral.  As a result, the party responsible for collecting and paying the deferred amount is actually the business. This has caused concern for many because it is unclear how collections will work when an employee has left the company or in similar situations. The door is open to potential risk factors which carefully need to be considered.

There is some concern that if Congress ultimately enacts a payroll tax forgiveness, they could draft the forgiveness to apply to only the deferred payroll taxes, and not forgive the amounts that employers elected to pay as previously scheduled.  Aside from presidential remarks, there had been no legislative proposals to forgive any payroll taxes, so this remains a purely speculative anecdote.

Suggested Next Steps

For businesses that do decide to participate in this deferral option, it is important to ensure the following steps are taken to set expectations and manage risk.

  • Send written communication to all employees outlining the expectation that anyone who participates in the program will be required to pay back deferred payroll taxes according to the timeline above.
  • Consult with a business attorney to draft a contract that requires participating employees to agree to additional Social Security tax withholding during the repayment timeline.
  • In the same contact, be sure to add language requiring the employee to reimburse the company for any deferred payroll taxes in the event they terminate employment or do not earn sufficient income.
  • When appropriate, be sure to communicate these changes to third party payroll providers including the obligation to increase withholding in the new year.

Contact Us

The recently issued IRS guidance provides important details and information needed to properly administer the program. However, the number of unanswered questions has left many wondering if they should even participate. If you have questions about the information outlined above or need assistance with another tax or accounting issue, Selden Fox can help. For additional information call us at 630.954.1400 or click here to contact us. We look forward to speaking with you soon.

About the Author:
Paul Rozek provides tax research, consulting, and compliance services to closely-held businesses, tax-exempt organizations, individuals, and fiduciaries. His clients include family offices, private foundations, trade associations, charitable organizations, schools, credit unions, and other nonprofit entities.