The U.S. Department of Treasury and Internal Revenue Service (IRS) issued official guidance for taxpayers on the “payroll tax holiday” ordered by President Donald Trump in early August as part of COVID-19 relief. The guidance provides a temporary respite from Social Security taxes, but is only a tax deferral, not tax forgiveness. Forgiving these taxes so employees would not be required to pay back tax amounts deferred would require enacting new legislation.
The guidance allows employers to defer withholding on compensation from September 1, 2020 through the end of the year, and then withhold those deferred amounts in the first four months of 2021 to repay the tax obligation. This deferral only applies to employees whose pretax wages or compensation is less than$4,000 for any biweekly pay period, including salaried workers earning less than$104,000 per year.
The deferral only applies to the employee’s portion of Social Security taxes, which is 6.2 percent of pay for qualifying workers. For those employers who defer withholdings, employees will see their Social Security payroll taxes increase to 12.4% for the first four months of 2021.
This could provide relief to employees who are currently struggling, but might create an issue when those individuals have twice as much withheld in 2021.
Employers are responsible for withholding and paying back any deferred taxes, and the employer is responsible for recovering those taxes from employees or interest, penalties, and additions to tax will become due. Employers are directed to “make arrangements to otherwise collect the total Applicable Taxes from the employee” but the guidance does not provide details on how. This could be an issue if an employee leaves an employer early next year.
Employers can decide whether they want to opt-in or not and the guidance includes no penalties for noncompliance. Many companies are expected to opt out to avoid dealing with the difficulty of implementing a payroll tax deferral and burdening employees with large tax bills next year. In addition, some employers may not want to take on the additional risk of paying back deferred taxes.
The guidance leaves many questions to be answered, which will hopefully be addressed at a later date.
The experienced professionals at RJI CPAs can help you navigate the new payroll tax deferral and its potential impact to your business.
Manuel J. Ramirez, CPA MST FABFA
Manuel is Chairman/International Tax Partner at RJI CPAs, with specific experience in international and multi-state taxation, M&A transactions, and representation before the IRS and state regulatory agencies. Manuel can be reached at 949-852-1600 or MRamirez@rjicpas.com.
Fernando Jimenez, CPA, MST, CEO
Fernando Jimenez is the Chief Executive Officer and tax partner of RJI CPAs. Fernando has experience in corporate re-organizations, buy/sell transactions, representation before the IRS and state agencies, succession and operations planning, and transactional analysis. He can be reached at 949.852.1600 or fjimenez@rjicpas.com.
About RJI CPAs
Established in 1980, RJI CPAs specializes in audit, accounting, corporate and international tax issues for publicly traded and privately held companies. RJI is PCAOB registered and the Southern California member firm of DFK International, the 8th largest global accounting network.
