President’s Memorandum and IRS Guidance on Payroll Tax – Proceed with Caution
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On August 8, 2020, President Trump signed a series of Executive Orders to provide some relief to Americans financially impacted by the COVID-19 pandemic. These came about due to Congress’s inability to come to an agreement and pass another economic stimulus bill. Specifically, one of the Executive Orders provides immediate relief to qualifying individuals through a payroll tax deferral program. It was designed to provide a temporary boost by not requiring payment of the employee’s Social Security tax obligation. Many California and Texas businesses were unable to take action on the program because there were more questions than answers–we did not know when or how the deferred tax would be paid or who would ultimately be responsible for paying the tax. We now have some of those details but many questions remain.
Late last week, the IRS finally issued Notice 2020-65, which outlines how the program will function. To help clients, prospects, and others, JLK Rosenberger has summarized the key details below.
As highlighted in the Executive Order, an employer may defer the employee portion of payroll taxes between September 1, 2020, and December 31, 2020. The deferral applies only to the 6.2% Social Security tax withheld as part of the Federal Insurance Contributions Act (FICA) withholding. The 1.45% Medicare tax is excluded from this program. The guidance clarifies that pre-tax compensation and wages paid for a bi-weekly pay period threshold amount of $4,000 ($104,000 annualized) qualify as Applicable Wages. In cases where the pay period duration differs, then the equivalent amount must be met. Wages and compensation that exceed this amount are ineligible.
In addition, eligibility is determined on a pay-period by pay-period basis. This means an employee may qualify for one pay period and not the next if the threshold is exceeded. Therefore, the ability to participate may change on an ongoing basis.
Deferred taxes must be repaid between January 1, 2021, and April 30, 2021; otherwise, penalties and interest will begin to accrue.
An important term is used in the guidance that businesses should carefully note: Affected Taxpayer. This refers to the party responsible for collecting and remitting tax payments, which in this case, is the employer, not the employee. Surprising, to say the least, and it has caused concern for many because it is unclear how collections will work when an employee has left the company or in similar situations.
Program participation is voluntary, allowing each business to decide if they want to participate. When deciding, it is important to not only consider the risks but the administrative expenses as well. Participating businesses will have to bear the cost of employee education, additional written communications, and regular changes to payroll withholding based on eligibility. There is also concern about participants’ practical impact when payroll taxes double after the first of the year. It boils down to whether the added risk and administrative expenses are worth the benefit.
The recently issued IRS guidance provides information essential to implementing the payroll tax deferral program. Unfortunately, several issues were not addressed, which has left many wondering if participation is the best option.
If you have questions about the guidance as outlined above, or any other tax or accounting concern, reach out to your JLK Rosenberger team member or Ken Kathcart at 949-860-9893 or click here to contact us.