IRS Issues Guidance on Payroll Tax Deferral

The IRS issued guidance on the payroll tax deferral from President Trump’s Executive Order. The text of the IRS notice can be found here. The important points of this guidance are as follows:

• The payroll tax deferral applies to the 6.2% employee side of Social Security taxes.
• The deferral period is for payroll pay dates occurring from September 1st through December 31st, 2020.
• Wages must be less than $104K annualized on each payroll where the tax is deferred. In other words, the deferral eligibility is made on a pay-period-by-pay-period basis. The below schedule will help determine these gross salary/wage limits:
  • Weekly pay = $2,000
  • Biweekly pay = $4,000
  • Semimonthly pay = $4,333.33
  • Monthly pay = $8,666.67
• Any amounts that normally excluded from box 3 Social Security wages on a W-2 will not count towards the above limits
• Employers must withhold the deferred taxes, in addition to the regular resumed payroll tax withholdings, from January 1st through April 30th, 2021. Penalties and interest would begin accruing thereafter.

Under the IRS guidance on payroll tax deferral, it appears employers are on the hook for the repayment of the taxes. This could cause a problem if an employee who deferred payroll taxes departs from the company prior to repaying the deferred taxes. The Notice states that the employer can make alternate arrangements to collect the Applicable Taxes. How exactly that would be done, and whether it would be possible to collect, is up for debate.

Our advice to employers is to steer clear of the payroll tax deferral as it presents more risk than reward. Our advice to employees is to take advantage of it if your employer offers it because there is a chance it could be forgiven in the future (watch this video for our reasoning).