On August 8, President Trump signed an executive order that allows employers the option to defer withholding, depositing, and paying into specific payroll tax obligations. Following the order, the IRS has issued guidance in Notice 2020-65 to help employers facilitate the change in policy. 

This guidance comes amidst numerous questions, and even concerns, about implementing the deferral. The order defers only the employee’s portion of Social Security taxes; the employees will need to pay back the taxes at a later date unless Congress passes legislation that would eliminate the liability. 

Deferral basics

As per the IRS’ Notice 2020-65, the deferral pertains to “applicable wages,” which means wages or compensation paid to an employee between September 1, 2020-December 31, 2020. However, this only applies to amounts paid in a biweekly pay period that are less than $4,000 or the equivalent amount with respect to other pay periods.

Under the guidance, employers can postpone withholding and remitting the employee’s share of Social Security taxes until the period beginning on January 1, 2021, and ending on April 30, 2021. However, starting on May 1, 2021, penalties, interest, and additions to tax will accrue for unpaid taxes.  

“If necessary,” the Notice states, employers “may make arrangements to collect the total applicable taxes” from their employees, but it doesn’t provide further details. 

Note that the CARES Act already allows employers to defer paying their portion of Social Security taxes through December 31, 2020. Any amount deferred in 2020 will be due in two equal payments, one at the end of 2021 and the following at the end of 2022.

Not all employers opting in

The executive order has been controversial among some business groups. Several have publicly stated that their members will not participate. Notably, the U.S. Chamber of Commerce and more than 30 trade associations penned a letter to Congress and the U.S. Department of Treasury that called the deferral “unworkable.”

Their concern stems from the future burden the measure would place on employees, providing only a temporary increase in paychecks to be followed by a decrease in 2021. 

“Many of our members consider it unfair to employees to make a decision that would force a big tax bill on them next year… Therefore, many of our members will likely decline to implement deferral, choosing instead to continue to withhold and remit to the government the payroll taxes required by law,” the group stated.

Others have also posed the concern about collecting taxes from individuals who leave their employment, either voluntarily or involuntarily, before April 30, 2021. Employees have also had questions about the deferral, which has prompted employers to determine their position on participating. For those that are, they’re explaining what the deferral means for paychecks in 2021.

What comes next

We know 2020 has been a complicated year for both employers and employees alike. If you have questions about how the deferral might impact your business, contact Smolin Lupin today to set up an appointment with one of our team members.