IRS Issues Guidance on President Trump’s Payroll Tax Deferral Executive Order

The IRS has recently released guidance on President Trump's Executive Order deferring certain payroll taxes. While this guidance comes just before the start of the deferral period and answers some questions, many more remain. The following summarizes the current guidance that we do have from Treasury and the questions that still need answers before the September 1, 2020 start date.

Background

Typically, employees and employers each pay half of the total 12.4% Social Security tax due for each worker. The CARES Act has previously provided for a deferral of the employer’s share of payroll taxes. President Trump signed an Executive Order on August 8, 2020 allowing for employers to opt into a temporary deferral of employee’s share of Social Security for the period of September 1, 2020 through December 31, 2020 for qualifying employees. The Executive Order does not call for the deferral of the employee’s share of Medicare tax on wages, so these amounts will still need to be withheld and remitted during this deferral period. The deferral will only apply to employees with bi-weekly pre-tax income that is less than $4,000 (capping qualified employees to those earning less than approximately $104,000 a year). Employees earning over this amount will not be eligible for deferral.

Treasury Department Guidance
The Treasury Department released Notice 2020-65 on Friday, August 28th, which provides guidance on the Executive Order’s payroll tax deferral. While Notice 2020-65 provides some answers, there are many questions still remain.

The Notice makes clear that the President, using his current authority under §7508A of the code, does not have the authority to forgive or eliminate payroll taxes. The authority granted under the code only allows for a deferral of these taxes. While President Trump has indicated that he will seek forgiveness for the deferred payroll taxes, Congress will need to pass legislation that provides for this forgiveness.

The Notice clarifies that while employers are permitted to stop withholding any tax on behalf of their employees, the taxes are only deferred until January 1, 2021 at which time repayment procedures will begin. The Notice specifically indicates that Employers who choose to defer the payroll taxes will have an obligation to repay those deferrals by April 30, 2021 or be subject to penalties and interest. Employers would have to recover those deferred taxes from their employees between January 1, 2021 and April 30, 2021 to be in compliance with the repayment period.

Questions Still Remain

The Notice fails to address several key issues. For instance, the Notice fails to address what obligations would exist for an employer who defers payroll taxes for an employee that leaves the company prior to the repayment period. The Notice also fails to address whether this is a mandatory or optional deferral that employers can opt in to or out of, though Secretary Mnuchin previously indicated in an interview that the deferral would not be mandatory. It should be noted that the Notice indicates that employers can “make arrangements to otherwise collect the total Applicable Taxes from the employee” if necessary, but does not provide details on what those arrangements, or necessary circumstances, may be. The Notice does not address deferrals for self-employed individuals.

We urge employers to use caution before enacting this program due to the uncertainties that surround it.

At this time many questions still remain and we anticipate additional guidance from Treasury before implementation of the deferral tomorrow. If there are any questions about how this payroll tax deferral may impact you or your business, please reach out to your HBK Tax Advisor.

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About the Author(s)
Cassandra Baubie is an Associate at HBK CPAs & Consultants and is a member of its Tax Advisory Group (TAG). Cassandra joined HBK in 2017. She works in the firm’s Youngstown, Ohio office. She has experience in tax law research and writing. Prior to joining HBK, she worked for Jurist.org, a global legal news organization, and was a member of the University of Pittsburgh Tax Law Review Journal. Cassandra also worked for the University of Pittsburgh School of Law’s Low-Income Tax Clinic where she performed IRS litigation and Tax Court work and provided compliance work for low income individuals and businesses. Cassandra focuses on issues pertaining to State and Local Taxation (SALT), as well as flow through entity taxation. She has been involved in numerous sales and use tax, franchise tax, and corporate income tax audits, VDA’s, and refund requests. She focuses on complex sales and use tax compliance planning, nexus studies and on-site review and training for all SALT related issues, and has managed various engagements as the in-charge team member and has significant experience in multi-state tax issues.
Hill, Barth & King LLC has prepared this material for informational purposes only. Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.

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