Federal Tax Update: IRS Issues Guidance on Employee Payroll Tax Deferral
In an Executive Order signed on August 8, 2020, President Donald Trump directed Treasury Secretary Steven Mnuchin to defer withholding, deposit, and payment of the 6.2% employee's share of payroll tax on certain wages and compensation for eligible employees1 during the period of September 1, 2020 through December 31, 2020.
On August 28, 2020, the Department of the Treasury issued guidance pertaining to the implementation of this Order. During the deferral period, employers are allowed to refrain from withholding the employee portion of payroll taxes, which - from the employee's perspective - will appear upon initial inspection to be an increase in wages. Neither the guidance from the Treasury nor the comments from Secretary Mnuchin indicated that employees are required to defer this withholding.
However, beginning on January 1, 2021 through April 30, 2021, employers are required to withhold additional payroll taxes as a means to recuperate any deferred amount (in addition to ordinary withholdings attributable to the January through April 2021 pay periods). In effect, this constitutes "double withholding" during the first four months of 2021 to "make up" for the amounts deferred from September 1, 2020 through December 31, 2020.
Absent additional guidance which clarifies the payroll responsibilities of employees, our recommendation is to ignore this directive and continue withholding as normal. Employee confusion may abound at that fact that the deferral of the employee portion of the payroll tax does not equate to forgiveness. Employees could be placed in a difficult financial position when their payroll withholding rate is effectively doubled in the first part of 2021.
In addition, from the employer's perspective, following this guidance presents a degree of risk. For example, if an employee is no longer employed after December 31, 2020, the employer must still pay any deferred payroll tax for such employee during the January through April pay periods.
Please note that this summary is for your general information and is not legal or tax advice. If you have any questions or if you would like specific guidance as to how we may be able to assist you in your particular situation, please contact us.
1 Only employees making $4,000 or less per bi-weekly pay period, calcuated on a pretax basis, are eligibile for the deferral.
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