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Last Friday, the Department of Treasury and Internal Revenue Service issued Notice 2020-65 implementing President Trump’s Executive Order allowing employers the option to defer withholding and payment of the employee’s portion of the Social Security tax* if the employee’s wages fall below a certain threshold.
The payroll tax deferral is available with respect to any employee if their wages or compensation during any bi-weekly pay period are less than $4,000 calculated on a pre-tax basis or the equivalent amount with respect to other pay periods (“applicable wages”). The determination of these wages is made on a pay period-by-pay period basis. The deferral period begins September 1, 2020 and ends on December 31, 2020.
It’s important to note that opting for the payroll tax deferral will eventually result in a smaller paycheck for eligible employees next year when the deferred taxes become due. While the Presidential Memorandum states that the “Treasury shall explore avenues, including legislation, to eliminate the obligation to pay the taxes deferred,” the current guidance does not address forgiveness. Rather, the Notice states that it is the employer’s responsibility to withhold and pay the deferred taxes ratably from wages paid between January 1, 2021 and April 30, 2021 or they will be assessed interest and penalties beginning on May 1, 2021.
The new guidance raises several questions such as what happens if the employee leaves the company or there are insufficient wages to cover the deferred taxes? Do eligible employees have any authority to elect the deferral or does the absolute discretion lie with the employer and if so, can they pick and choose who gets the deferral? We anticipate that the Treasury and IRS will issue more guidance to address these issues.
*Tax rate for wages paid in 2020 is set by statute at 6.2% of wages up to $137,700
As always, Lanigan, Ryan, Malcolm & Doyle will continue to monitor this evolving situation and add updates to our COVID-19 Resource Center as they become available. As an “essential” business in the state of Maryland, we will continue to work for clients to meet upcoming deadlines, while emphasizing the safety of both our clients and our team. Please know that your Lanigan, Ryan team members are always available for questions.