At a Glance: Deferred Employee Taxes and IRS Guidelines
By: Brad Rapp
President Trump issued an Executive Order on August 8, 2020 titled “Memorandum on Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster” (the “Order”). The Order directs the Treasury to permit, for certain employees, deferral of the employee portion of Old Age, Survivors, and Disability Insurance (“OASDI”) taxes for payroll dates from September 1, 2020 through December 31, 2020, which is a 6.2% tax on compensation. This is not a deferral of the employer’s obligation for the 6.2% tax during this same period, and the employer must continue paying such tax. The total OASDI tax is 12.4%, and the employer and employee equally split the responsibility in each pay period.
Just last Friday, August 28, 2020, the IRS issued Notice 2020-65 (the “Notice”) to provide guidance in relation to the Order that went into effect September 1, 2020. Here is a link to the Notice.
The tax deferral is only available to employees whose biweekly pay is below $4,000 on a pretax basis, or $104,000 annually, and what is and is not counted as wages and compensation is not clear in the Order or the Notice. It is possible that if pay fluctuates between pay periods, an employee could qualify for deferral in some pay periods and not in others.
It is of paramount importance to recognize that the employee’s tax is only deferred, not forgiven. Although President Trump has promised to do away with the tax if re-elected, that would require an act of Congress to forgive the liability altogether.
The deferred tax shall be paid in full by April 30, 2021 and there is guidance that it can be paid ratably between January 1, 2021 through April 30, 2021 by deducting the deferred tax from an employee’s regular pay. So the tax an employee would be paying for that 4 month period in 2021 would be 12.4% of compensation (6.2% for the current period and 6.2% for the deferred tax). If the full amount of the deferred tax is not paid by April 30, 2021, the employer (not employee) will become liable for penalties, interest, and “additions to tax” for such non-payment. The Notice provides that employers can “make arrangements to otherwise collect” the deferred taxes, and one example is an agreement with an employee that any deferred taxes can be withheld from a departing employees last paycheck if the deferred taxes have not been paid back at the time an employee ceases employment, although an employer should confirm such steps with their state wage payment laws.
Any employee that defers the tax this Fall will see a temporary increase in their take-home pay, but they’ll likely have smaller paychecks for the first four months of 2021.
Neither the Order nor the Notice require an employer to defer the payment of employee OASDI taxes. An employer may choose to continue to withhold and deposit employee OASDI tax as usual for the last 4 months of 2020. And there is no guidance that an employee can require an employer to defer the tax.
We here at Rapp & Krock, PC are ready to answer any of your questions or help you analyze options.
ABOUT THE AUTHOR:Bradley W. Rapp is a Shareholder at Rapp & Krock, PC in the Business Transactions group.
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