On August 28, 2020, the U.S. Treasury Department and Internal Revenue Service (IRS) issued Notice 2020-65 (Treasury Notice). This notice implemented the Presidential Memorandum that was issued on August 8, 2020 which allowed Employers the option to defer (i.e. postpone) withholding and payment of Social Security tax for employees whose wages are below $4,000 biweekly, or equivalent amounts with respect to other pay periods, for wages paid September 1 through December 31, 2020.
As we have done with previous items such as this, we wanted to provide an explanation as to what this really means for you, the Business Owner/Employer. In essence, it boils down to the following four (4) bullet points:
- Employers remain liable to collect from employees and pay to the IRS after December 31, 2020, the full amount of the employee Social Security taxes deferred.
- Employers are required to withhold the total taxes deferred for an employee from the employee’s wages ratably for the four-month period from January 1 – April 30, 2021.
- If an employee is not employed with the Employer for the full four (4) month payback period, the Employer is still obligated to pay the total deferred taxes to the IRS. Interest, penalties and additions to tax will begin to accrue on May 1, 2021.
- Employers are permitted, if necessary, to “make arrangements to otherwise collect” the total taxes due from the employee, but the guidance is silent on how an Employer may do so.
NOTICE TO EMPLOYERS
If you, the Employer, elect to allow employees to defer, you must withhold and pay the total taxes deferred from January 1, 2021 through April 30, 2021. For example, if an employee deferred a total of $1,500 during the September 1 – December 31 period, the Employer must withhold a total of $1,500 over the scheduled number of payrolls between January 1 & April 31 (4 payrolls = $375/payroll, 8 payrolls = $187.50/payroll, etc.)
The IRS will require all deferrals to be properly reported and reconciled and will collect any deferred amounts not paid by April 30, 2021, from the Employer. Interest, penalties and additions to tax, for which Employers would be liable, will begin to accrue on May 1, 2021, with respect to any unpaid taxes. The Notice also provides the Employer the ability to make necessary arrangements to otherwise collect amounts paid by Employer for employee but does not go into detail as to how this is to be.
IS THIS MANDATORY?
Employers DO NOT HAVE TO OFFER this deferral to their employees. However, if offered to one, it must be offered to all that are eligible.
We believe that many Employers, who opt out, will experience push-back from their employees who may want extra funds during the holidays. As an Employer, this can be daunting and you will need to decide how to address with all employees.
We suggest that Employers consider the following when deciding whether or not to implement (allow) employees to defer payroll taxes:
- Initiate the conversation with employees as soon as possible. Let employees know that this is not “free money” but only a loan and that starting on January 1st, they will see a “double deduction” for their portion of FICA & Medicare.
- Explain that the choice to defer is at the Employer’s discretion
- Consider the additional costs to you, the Employer, to do this
- Some employees may be upset if the Employer opts out. Clear and complete communication is recommended to help mitigate this problem.
- Repayment is placed directly on the shoulders of the Employer.
- Additional tax reporting will be required. We believe that these amounts will be reported on the 3rd and 4th quarter Form 941s and maybe even employee W-2s.
We realize that this is not an easy time for the small business owner. As your Trusted Advisor, LCPA encourages you to contact us should you have any question or just need a sounding board – as a team, we can help you find a solution that will work.