U.S. Department of Treasury Issues IRS Notice on Payroll Tax Deferral
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On August 28, 2020, the U.S. Department of Treasury issued IRS Notice 2020-65 in response to President Donald Trump’s earlier memorandum directing the Secretary of the Treasury to defer the withholding, deposit and payment of certain payroll taxes.
09.18.20
IRS Notice 2020-65 provides that taxes imposed by the Internal Revenue Code Section 3101(a) on taxable wages paid from the period beginning September 1, 2020, and ending December 31, 2020, may, at the employer’s discretion, be deferred to the period beginning January 1, 2021, and ending April 30, 2021. This deferral is applicable only if the amount earned by an employee for a bi-weekly pay period is less than $4,000, or an equivalent amount if the employer uses a different pay period. While the goal of President Trump’s memorandum and IRS Notice 2020-65 was to increase the money paid to employees to account for hardships during the pandemic, these payroll tax obligations are being deferred, not waived, so employees will likely see a reduction in the amount paid per paycheck between January and April 2021 – reversing the 2020 extra payments -to account for such deferred taxes. The deferral is also complicated. Bi-weekly pay must be tested against the $4,000 test every pay period, so an employee may be eligible one pay period and not the next.
Further, the notice left many unanswered questions that employers should consider before deciding whether to implement the deferral. For example, if an employee is terminated or quits before paying back the deferred amount, it still must be paid back. Employers remain responsible for paying the withheld taxes in full by April 30, 2021, or they risk being subject to penalties and interest, regardless of the employee’s status. If Employers withhold sums to ensure that the proper amount will be available by April 30, 2021, to repay the deferral, why participate? IRS Notice 2020-65 provides that employers should “make arrangements” to collect such deferred taxes from employees. Will a final paycheck be sufficient to repay the tax obligation, assuming that such withholding is permissible? Thus, employers should consider administrative and liability issues before deciding to participate.[1]
A copy of IRS Notice 2020-65 can be found here.
The COVID-19 Task Force at Klehr Harrison stands ready to assist you in your business and legal needs. We will continue to provide additional information and guidance as the COVID-19 situation develops.
[1] Various other employment related laws may be implicated based on this notice or an employer’s choice to “make arrangements” to collect deferred taxes.