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IRS Issues Guidance on Presidential Payroll Tax Deferral Memorandum

AAFCPAs would like to make clients aware that the Treasury issued IRS Notice 2020-65 which provides guidance on the August 8, 2020 Presidential Memorandum directing the Treasury to allow employee deferral of withholding, deposit and payment of certain payroll tax obligations.

Which Employees are Eligible to Defer?

The deferral is restricted to any employee whose wages or compensation paid during the period beginning on September 1, 2020 and ending on December 31, 2020, on a bi-weekly pay period, is less than $4,000.  The deferral applies to wages paid between September 1, 2020 and December 31, 2020, irrespective of the amount of wages or compensation paid to the employee for any other pay period.

What are the Employee Considerations?

The employee’s take-home pay will be greater during the period above; however, IRS Notice 2020-65 makes it clear that the amount not withheld will need to be paid back between January 1, 2021 and April 30, 2021 or interest and penalties will begin to accrue.

What are the Employer Considerations?

It is the employer’s obligation to withhold social security, and the employer will bear the burden of administering the deferral, including increased fees from their payroll company and the risk of errors with implementing such a new program.

Additionally, there is the question of what happens if the employee has the social security deferred and then leaves employment before the balance of the deferred amounts are repaid.  As it is the employer’s obligation to withhold, and in the current absence of a mechanism in place to collect the deferred social security payments, this amount would fall on the employer. IRS Notice 2020-65 mentions only that, “if necessary, the Affected Taxpayer may make arrangements to otherwise collect the total Applicable Taxes from the employee.”  AAFCPAs encourages clients to consider this additional risk.

Is this Deferral Mandatory?

IRS Notice 2020-65 is silent on whether this program is mandatory, but there are no penalties that could apply if employers continue to withhold.

Neither the Presidential Memorandum, nor IRS Notice 2020-65, require an employer to defer the payment of employee social security withholding.  Additionally, prior to the issuance of IRS Notice 2020-65, Treasury Secretary Munchin was quoted as saying “we’re going to create a level of certainty for employers that want to participate… we can’t force people to participate.”

In section 2(a) of the Presidential Memorandum, the language states that “ the deferral shall be made available with respect to any employee the amount of whose wages or compensation, as applicable, payable during any bi-weekly pay period generally is less than $4,000, calculated on a pre-tax basis, or the equivalent amount with respect to other pay periods.”

Until there is further guidance, AAFCPAs advises clients to consider this program optional for the employer.

What do we advise?

AAFCPAs advises clients to consult with your AAFCPAs Partner to discuss your unique facts and circumstances in order to determine whether this deferral program would be right for you and your employees.

Most clients, absent additional guidance, have planned to opt out of the program after careful consideration of the risks to employee and employer.

As always, AAFCPAs will continue to monitor COVID-19 related developments and keep you informed as significant changes occur or provisions become clarified. If you have any questions please contact: Christopher Consoletti, Esq. at 774.512.4180, cconsoletti@nullaafcpa.com; or your AAFCPAs Partner.

About the Author

Chris Consoletti
Chris, in conjunction with AAFCPAs’ multi-disciplinary team of CPAs, investment & business advisors, provides effective tax planning and research, tax compliance, charitable planning, and asset protection solutions for trusts & estates, corporations and partnerships. Chris provides clients with corporate law analysis and recommendations related to entity formation, management and board structure, executive compensation, limited liability protection, and the applicable laws of relevant states and jurisdictions. He evaluates and assesses opportunities and risks associated with complicated tax challenges or controversies.