IRS Issues Guidance on Payroll Tax Deferral

The IRS issued guidance on the payroll tax deferral that was ordered by the President in a presidential memorandum on Aug. 8 (Notice 2020-65). The notice allows employers to defer withholding on affected employees’ compensation during the last four months of 2020 and then withhold those deferred amounts during the first four months of 2021.

Implementing this deferral is optional for each employer. Some employers have expressed concerns due to unknown impacts, such as the impact on affected employees when the “catch-up” withholding is implemented in January of 2021. Or, the process for collecting these taxes from employees that no longer work for the organization.

Under the guidance, employers can defer the withholding, deposit, and payment of the employee portion of social security taxes on wages paid from Sept. 1 through Dec. 31, 2020. The deferral applies to of the old-age, survivors, and disability insurance (OASDI) tax under Sec. 3101(a). The due date for withholding and payment of these taxes is postponed until the period beginning Jan. 1, 2021, and ending April 30, 2021.

The deferral applies to any employee whose pretax wages or compensation during any biweekly pay period generally is less than $4,000. Under the notice, the determination of applicable wages is to be made on a pay-period-by-pay-period basis — meaning that if the amount of compensation payable to an employee for a particular pay period is less than the threshold amount ($4,000 for biweekly pay periods), then the payroll tax deferral applies to that compensation, irrespective of the amount paid to that employee in other pay periods.

The notice requires affected employers to withhold and pay the deferred taxes from wages and compensation paid during the period between Jan. 1, 2021, and April 30, 2021. Interest, penalties, and additions to tax will begin to accrue on unpaid taxes starting May 1, 2021. The notice says, that, if it is necessary, employers can “make arrangements to otherwise collect the total Applicable Taxes from the employee” but does not provide details on that requirement.

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