The IRS recently issued updated guidance on the August 8^th presidential executive order regarding the employee payroll tax deferral, which went into effect September 1, 2020. The executive order allows the deferral of withholding and payment of employee social security taxes from wages paid September 1, 2020, through December 31, 2020.

Gorfine, Schiller &Gardyn’s (GSG), Tax Director, Matt Keefer, discusses important updates stated in the recent guidance, including that the deferral is optional for some employers.

Q: What are the details ofthe payroll tax deferral?

A: Every employer that's paying employees’ wages is required to withhold the 6.2% social security tax, assuming that employee hasn't exceeded the social security wage limitation.

This new deferral program is supposed to defer that 6.2% social security tax on employees from September 1, 2020 through December 31, 2020. It’s important to note it's just a deferral, and more importantly, the new guidance clarifies how that deferred tax is going to eventually be repaid.

Q: What updates were released in the most recent guidance?

A: The IRS was required to give guidance on the presidential order, and they released that guidance on August 31, 2020. They defined the period of which the wages are not required to withhold the social security tax, and it falls in line with the presidential orders from September 1, 2020 through December 31, 2020. Employers are to defer the social security tax for employees’ wages from that timeframe.

In addition, the new guidance went on to clarify how those taxes are to be repaid and who is actually responsible for those deferred taxes. The employer is ultimately responsible for withholding that tax from their employees. They would also be the responsible party for making deposits of those taxes, which would have to be withheld from employees’ wages from January 1, 2021 through April 30, 2021.

Employers would then need to deposit the taxes by May 1, 2021. Otherwise, they'll start incurring interest in penalties.

Q: This deferral does not necessarily mean forgiveness. What does the new guidance reveal about paying back the deferral?

A: From the employee perspective, if they defer this withholding, they'll get a larger paycheck from September through December 31, 2020. However, January 1, 2021 through April 30, 2021, the employer is then going to have to withhold additional tax in a pro rata manner, equivalent to the amount that was deferred. This could result in a double tax in employees' wage withholdings during that timeframe. Basically, the employee is going to get more now, but have to pay it later, which is not an appealing outcome for employees.

As it currently stands, employers are the party responsible for collecting and paying the tax, and that presents problems.

For example, if an employee is terminated after December 31, 2020, they're not going to have any wages to withhold that tax. They're going to still have to pay that amount that was deferred to the government. According to the guidance, the employer can make an arrangement with the employee to get that amount of tax repaid, which does not seem like a feasible arrangement for most employers.

Q: This is essentially an executive order from the president, but companies don't necessarily have to adhere to it. They can keep business as usual in the same tax withholdings for employees. Is that correct?

A: That's correct in the way it's currently written, and it's hard to say whether or not they're going to come back out and clarify that further or not. Right now, it's not officially a mandate, and it seems that there's a large portion of the employer population that's probably not going to plan on following the order.

The potential obligations for the tax, and not being able to collect from the employees, could potentially be a large burden on the employers. Also, from the perspective of the administration of this, payroll companies have said that in order to put this in place, they would have needed much more time than what was provided.

Q: How can GSG’s services assist with this, both for businesses and for individuals?

A: GSG can assist mainly by staying on top of additional guidance that may be released. We’ll also proactively have conversations with clients on whether it makes sense for them to follow this order or not. For most employers, it’s challenging to see where there's an advantage to follow this mandate.

There may be some employee resentment if you aren't following this mandate, but if it’s explained to employees how they're going to receive lesser paychecks in the first four months for 2021, employees will be more likely to understand.

GSG will continue to monitor any new guidance that is released. In the meantime, contact us with any questions regarding the payroll tax deferral program.

About the Author:

Matt has more than 15 years of public accounting experience. His responsibilities include preparing and reviewing income tax planning for corporations, partnerships, individuals and not-for-profit organizations, responding to federal and state tax notices, tax planning for high net worth individuals, and representing taxpayers before the IRS and state governments. For more information, click here.