IRS Issues Guidance Regarding Payroll Tax Deferral

On Friday, August 28, the Internal Revenue Service (IRS) released Notice 2020-65, which offers guidance regarding the implementation of the Presidential Memorandum on the deferment of some payroll taxes.

The memorandum, which was released by the President on August 8th, called for a deferral of the employee share of social security tax (or the railroad retirement tax equivalent) due between September 1, 2020 and the end of the year. The deferral applies to employees who earn less than $4,000 (pre-tax) on a bi-weekly basis, with each pay period to be considered separately.

The IRS notice seeks to guide employers in implementing the tax deferral. In Notice 2020-65, the tax agency explains that applicable taxes not withheld during the deferment period must be paid between January 1, 2021 and April 30, 2021. After May 1, 2021, interest and penalties will begin to accrue on any unpaid amounts; no interest or penalties will accrue on the deferred tax payments between September 1, 2020 and April 30, 2021. Click here to read the IRS release in full.

While this IRS release does offer highly anticipated information, there are still many questions that remain unanswered. In a letter to the IRS dated August 12, 2020, the American Institute of Certified Public Accountants (AICPA) requested guidance in a number of areas. The following items requested by the AICPA were not addressed in the IRS notice:

  • Whether or not the deferral is required or voluntary and, if the deferral is voluntary, if eligible employees need to take action in order to have the taxes deferred.
  • If deferral is voluntary and must be elected by the employee, whether the employee must elect to participate in the entire 4-month deferral period or if the employee can choose to make the election anytime during the 4-month deferral period.
  • Whether the IRS will provide a model notice for employers to use to inform their employees about opting into the 4-month deferral period.
  • Whether the $4,000 limit applies differently when employees have multiple employers.
  • Whether the IRS would offer explicit guidelines stating that the employee, not the employer, is ultimately responsible for paying any deferred payroll taxes.
  • Whether the increase in an employee’s take-home pay during the deferment period is subject to loan repayments, garnishments, child support payments, and more.

These items and more were not touched upon by the IRS release. For further details on the situation, click here to read an article from the Journal of Accountancy.

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