Treasury Department and IRS Release Guidance on Payroll Tax Deferral

Note: This article was updated on Friday, September 4, 2020.

On Friday, August 28, 2020, the Treasury Department and Internal Revenue Service issued guidance on President Trump’s August 8, 2020 executive order about the deferral of certain payroll taxes. On September 3, 2020, the IRS confirmed the payroll tax deferral is optional. Employers may, but are not required to, defer the withholding.

According to the guidance, the payroll tax deferral applies to the employee portion of two separate taxes – Section 3101(a), which is the old-age, survivors and disability insurance (OASDI) tax, and Section 3201, the Railroad Retirement Act Tier 1 tax. The guidance enables employers to defer the withholding, deposit and payment of these payroll taxes over the next four months.

Background

In the August 8, 2020 executive order, the president instructed Treasury Secretary Steven Mnuchin to defer the withholding, deposit and payment of employee Social Security tax or Railroad Retirement tax on wages or compensation paid to certain employees in the last four months of 2020. The Treasury Department was instructed to issue guidance on this deferral and also look for ways to eliminate the need for the deferred taxes to be paid later. Secretary Mnuchin stated on August 10, 2020 that employers would not be required to offer the deferral, but did not comment on whether or not the deferred taxes would have to be paid after December 31, 2020.

The Guidance

The guidance published on August 28 provides clarification on the executive order. A summary of the guidance is below.

• The employer payroll tax deferral applies to wages and compensation paid on a pay date during the period between September 1 and December 31, 2020.
• The employer payroll tax deferral applies to any employee who earns less than $4,000 (pre-tax) during any biweekly pay period (or less than $104,000 a year).
• The due date for payment of the deferred employee Social Security and Railroad Retirement tax has been postponed until the period beginning on January 1, 2021 and ending on April 30, 2021.
• If these withheld taxes are not repaid within the specified timeframe, then interest, penalties and additions to the existing tax requirements will begin to accrue on May 1, 2021.
• The guidance is being interpreted as non-binding, which means employers have a choice as to whether or not they want to implement the withholding of payroll taxes between September 1 and December 31, 2020. However, if an employer chooses to withhold the payroll taxes, employees cannot opt out of having their taxes withheld.

Unanswered questions

The guidance does not make clear if it is the employer or employee who will pay back the deferred taxes beginning January 1, 2021. If it is the employee who will be responsible, that means they will have twice as much withheld from their paychecks between January 1 and April 30, 2021.

It has been suggested that the payroll deferral could be turned into a payroll tax cut by an act of Congress, eliminating the need for the taxes to be repaid, but there has been no indication yet that Congress will vote to allow this.

Although there are some unanswered questions at the time of writing, Smith and Howard is available to answer any questions you may have. Please contact your Smith and Howard advisor by completing the contact form below or call 404-874-6244.