On Friday, August 28, 2020, the IRS issued guidance (the “Guidance”) implementing deferral of federal payroll tax withholding permitted by the August 8, 2020 Presidential Memorandum. Mika Meyers previously analyzed each of the Presidential Memoranda and the Executive Order issued on August 8 here.
The Presidential Memorandum and Guidance permit employers to defer the withholding, deposit, and payment of the employee portion of federal payroll taxes (Social Security tax) during the time period from September 1 through December 31 for any employee making less than $4,000 on a bi-weekly basis. Thus, employers which intend to offer relief to employees pursuant to this program need to quickly work to update payroll practices to begin offering relief on September 1.
Under the guidance, deferred amounts would be withheld by employers and paid on a pro-rata basis from January 1, 2021 through April 30, 2021. Employers are permitted to make arrangements other than bi-weekly withholdings to recover the deferred taxes from employees provided that all deferred amounts must be repaid prior to May 1, 2021 to avoid penalties.
Because the payroll taxes eligible for deferral pursuant to the Memorandum and Guidance are the employee’s portion of Social Security withholdings, employers should pay any amounts deferred between September 1 and December 31 directly to the employee.
The Trump Administration previously indicated it hopes the deferred payroll taxes will eventually be forgiven. However, forgiveness of the deferred amounts will need to be approved by Congress. Presently, Congress has not been able to agree on further relief for business and individuals impacted by COVID-19. Thus, at this time it is not known whether or not deferred federal payroll taxes will eventually be forgiven.
The Guidance leaves unanswered multiple questions regarding the repayment of deferred payroll taxes in the event they are not eventually forgiven. For example, how are deferred payroll taxes to be recovered from employees who leave a company’s employ prior to April 30, 2021? The Guidance also does not address how withholdings should be managed for part-time employees with an inconsistent work schedule or employees who work seasonally.
Critically, the Guidance does not address the Memorandum’s statement that the deferral “shall be made available” to employees whose wages are less than $4,000 on a bi-weekly basis, which suggests it is mandatory for employers to offer this relief. Accordingly, at the present time, it is anticipated that employer participation in this relief program is voluntary. Statements made by Treasury Secretary Steven Mnuchin during an August 12, 2020 interview seem to confirm that the Treasury Department considers employer participation optional. Even in the event the IRS subsequently identifies that employer participation in the relief program is mandatory, it is unclear what enforcement mechanisms the IRS has available to enforce participation. Existing IRS penalties applicable to employment tax matters generally apply to failure to make payments and improper reporting.
Because the Guidance identifies the employer as being the “Affected Taxpayer,” employers will need to analyze risks associated with the obligation to pay deferred amounts between January and April of 2021, such as penalties associated with nonpayment of taxes and the risk that business owners can be personally liable for tax obligations to the extent any distributions were made to owners of an insolvent company during the period deferred obligations were supposed to be repaid. Additionally, Michigan employers need to determine how they will administer this relief in consideration of state laws which may require employers to secure written approval from employees for deductions necessary to recoup the deferral in writing.
Nothing in the Memorandum or Guidance affects the employer side payroll tax deferral available to certain employers under the CARES Act or alters the repayment schedule of any employment taxes deferred pursuant to the Act.
Businesses are encouraged to contact their Mika Meyers’ attorney and accountant to analyze the extent to which relief under this program may be beneficial for their employees.