On August 8, 2020, President Trump issued a Presidential Memorandum and Executive Order whereby the President directed the Secretary of the Treasury to allow for the deferral of the employee-portion of payroll taxes withheld under IRC Section 3101(a) (6.2% for Old-Age, Survivors and Disability Insurance) on wages earned during the period of September 1, 2020 through December 31, 2020 (“Deferral Order”).
The Deferral Order applies to wages earned by employees who gross an amount of less than $4,000 on a bi-weekly basis (approx. $104,000 on an annual basis) and further states that any amount deferred shall be deferred without penalties or interest.
The Internal Revenue Service (“IRS”) later issued Notice 2020-65 on August 28, 2020 as guidance for the Deferral Order, which provides that employers must withhold and pay any taxes deferred, ratably, from January 1, 2021 to April 30, 2021 and that interest and penalties will begin to accrue on any unpaid amounts as of May 1, 2021.
Notice 2020-65 also clarifies that eligibility for the deferral is determined on a pay-period by pay-period basis. In other words, if wages earned in a particular pay period exceed the deferral threshold amount for such pay period ($4,000 for a bi-weekly pay period), then the Deferral Order does not apply to such wages.
Updated Instructions for Form 941 (Employer’s quarterly federal tax return) posted by the IRS on September 30, 2020 further provides that any supplemental wages, such as bonus or commission payments, will be disregarded for purposes of determining whether the regular wages are below the threshold amount if (i) such supplemental wages are paid in a separate check from regular wages, or (ii) if paid in the same check as regular wages, such supplemental wages and regular wages are clearly identified as separate from the other (each should be identified). Under such circumstances, the Deferral Order may apply to the tax due under IRC Section 3101(a) on the regular wages but not on the supplemental wages. Supplemental wages that are paid with regular wages in a single payment without the necessary differentiation are combined for purposes of determining whether the wages for the pay-period are below the threshold amount, and if below such threshold, then the Deferral Order will apply to the taxes due under IRC Section 3101(a) on the entire amount paid (supplemental and regular wages paid) in such pay-period.
Who is responsible for collecting and remitting any tax deferred pursuant to the Deferral Order?
- The employer. All taxes deferred pursuant to the Deferral Order must still be collected and paid by the employer, ratably, from January 1, 2021 to April 30, 2021.
What if an employer deferred tax for an employee who no longer works for the employer during the repayment period (January through April 2021)?
- Without additional guidance or action from Congress, the employer is responsible for remitting all taxes deferred.
What is the impact to employees of deferring withholding taxes pursuant to the Deferral Order?
- Employees will have deferred taxes withheld from their wages, ratably, from January to April 2021 (in addition to the withholding taxes collected and paid for the wages earned in such period).
Is the deferral optional?
- The Deferral Order and IRS Notice 2020-65 are silent on the requirement to participate by either an employer or an employee.
Does the employer have to ask the employee for input on whether to apply the Deferral Order on applicable wages paid to the employee?
- The employer may, but is not required, to ask employees for input.
What impact does the Deferral Order have on withholding taxes for Hospital Insurance due under 26 U.S.C. 3101(b)?
- Withholding taxes due under 26 U.S.C. 3101(b) (an additional 1.45% for Hospital Insurance) still must be withheld and paid timely.
What do we advise employers to do?
- Discuss the risks of deferring withholding taxes pursuant to the Deferral Order with your employment and tax advisors. The benefit and/or burden of deferring withholding taxes pursuant to the Deferral Order will vary depending on factors specific to each employer, such as the number of employees/size of the employer, the employer’s payroll procedures, company reserves and the likelihood of recouping the deferred amounts.