Payroll Tax Deferral: More Guidance, Same Uncertainty

We have previously written about the President’s executive memorandum regarding the potential payroll tax deferral for employee wages paid between September and December 2020: www.icemiller.com/ice-on-fire-insights/publications/the-question-remains-should-employers-withhold-em/.
 
In that discussion, we concluded employers likely needed additional guidance prior to making any decisions on whether to allow eligible employees the ability to defer social security taxes that otherwise would have been withheld. That guidance came from the Department of Treasury late Friday afternoon (days before the September 1 deferral start date), but what remained were many of the same questions.

First, the notice did provide two substantive areas of guidance:
 

1. Any social security taxes deferred from September through December would have to be repaid ratably from January to April 2021. Therefore, to the extent that these amounts were deferred during the next four months, such amounts would need to be remitted in the first four months of 2021. Accordingly, if this deferral is utilized, this results in employees having not only their traditional employment tax withholdings for their wages in early 2021, but also the social security taxes that otherwise would have been paid at the end of 2020.
2. The executive action indicated the deferral was for employees who made less than $4,000 on a bi-weekly basis. Many assumed that would be interpreted to mean employees who earned less than $104,000 on an annual basis. However, the recent guidance clarified that this determination was done on a paycheck-by-paycheck basis. Accordingly, if in one bi-weekly pay period an employee was under the $4,000 threshold, that employee was eligible for the tax deferral. Yet, if in the next bi-weekly pay period the employee was over the $4,000 threshold, that employee would not be eligible for the deferral in the second pay period.

However, the critical question for employers remained unanswered in this guidance. Are employers required to implement and/or offer this deferral to employees or is it at their discretion? The guidance was silent on this topic. It should be noted that Treasury Secretary Mnuchin in a mid-August interview indicated it was optional; however, that guidance was not incorporated into this official notice. Therefore, employers are left to evaluate the potential exposure and administrative difficulties of complying with this limited deferral regime.

Other questions remain notwithstanding the guidance. As we previously posited, there are questions as to whether an employer could be held liable for the social security taxes if there are not sufficient employee wages in 2021 to account for the employee’s deferred taxes. While the IRS guidance suggests the employer may be able to enter into alternative arrangements with the employee to account for such taxes—it fails to address the consequences if that is not feasible. 

Accordingly, the much anticipated guidance failed to provide a clear path forward for employers, which is even more problematic since September 1—the start of the deferral period—has arrived.

Feel free to contact Matt Ehinger or any member of Ice Miller’s Tax Group to discuss these new developments.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.