Guidance On Payroll Tax Deferral Creates As Many Questions As It Answers

08/29/2020 – Last night the IRS Issued Notice 2020-65 dealing with the employee social security tax deferral announced by the president on August 8, 2020, in a Memorandum to the Secretary of State. The Memorandum directed the Secretary of the Treasury to use his authority, pursuant to section 7508A of the Internal Revenue Code, to defer the withholding, deposit, and payment of certain payroll tax obligations. These obligations are the employee portion of social security tax under section 3102(a) or the railroad retirement tax equivalent under section 3202(a).

While the notice answers some questions it still leaves many questions unanswered and the deferral period starts only a few days from now.

What We Know From the Notice:

The deferral period is Sept 1, 2020 thru December 31, 2020 and it applies only to eligible employees that earn less than $4,000, bi-weekly or the equivalent amount based on their pay period, calculated on a pre-tax basis.

For qualifying workers, the deferral applies to the employee’s portion of Social Security taxes. This is the 6.2% of the total 7.65% of FICA taxes withheld from employees. The deferral does not affect the 1.45% that is designated for Medicare.

The Notice defines Affected Taxpayers not as employees, but as employers! It goes on to say “An Affected Taxpayer must withhold and pay the total Applicable Taxes that the Affected Taxpayer deferred under this notice ratably from wages and compensation paid between January 1, 2021 and April 30, 2021 or interest, penalties, and additions to tax will begin to accrue on May 1, 2021, with respect to any unpaid Applicable Taxes.” This means the repayment obligation is the responsibility of the employer and that the employer will be responsible for any interest and penalties on amounts not repaid.

It also makes clear that it is the employer’s responsibility to collect these deferred taxes from employees who participated in the deferral.

What We Don’t Know From the Notice:

The Notice doesn’t address what happens when an employee leaves the company or doesn’t make enough money to ratably pay back the tax, but it would appear that the obligation to make those payments remains with the employer.

It’s also fails to explain how this will be reported for tax purposes. We can only assume we’re going to see a revamped version of Form 941 (that’s a payroll tax form).

Also missing are any provisions for the self employed and it appears that self employed individuals have been purposely excluded.

Another very important missing item is a clear answer to the question of whether or not the deferral is optional, and if so, is it optional on the part of the employer or employee? While Treasury Secretary Mnuchin, has said that it would be optional, the notice contained no reference to this statement by the Secretary.

As you can see this notice is not the clear definitive statement that anyone wanted and with only days left until the deferral is scheduled to go into effect, those of us in the tax profession are left to argue over how we think things will shake out with very few definitive answers to many tough questions.