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IRS Issues Guidance on Payroll Tax Deferral Starting September 1

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The IRS issued much needed guidance in Notice 2020-65 last week regarding the option for employers to defer Social Security tax on employee compensation during the last four months of 2020. The rules allow employers to then withhold and pay the deferred payroll tax during the first four months of 2021.

  • The deferral applies to the employee portion of Social Security (6.2%) on the Applicable Wage (see definition below) for certain employees. The deferral does not include the Medicare portion of payroll taxes.
  • The deferral applies to any employee whose pretax wages or compensation (Applicable Wage), during any biweekly payroll period from September 1, 2020 to December 31, 2020, is less than $4,000.
  • The notice requires that employers withhold and pay the deferred payroll taxes (the Applicable Tax) in the first four months of 2021 from January 1 to April 30, 2021.
  • Deferred payroll taxes not paid by May 1, 2021 will be subject to late payment penalties and interest.

Guidance is still needed and has been requested by the AICPA to clarify that the election is voluntary and up to each employer to decide whether they will participate. Additionally, clarity has been requested on how eligible employees will elect into the program, the timing of that election, and what happens in cases where an employee is no longer with the company in the first four months of 2021.

As a practical matter, employers should weigh whether the deferral of the employees share of Social Security taxes for four months is worth the additional bookkeeping and compliance costs. Business owners should work closely with their payroll tax providers to discuss implementation of the payroll tax deferral as the Form 941 (Employer’s Quarterly Federal Tax Return) continues to evolve to reflect these changes.

If you have any questions please reach out to your team here at Berntson Porter and our Accounting Support & Bookkeeping Services (ASBS) practice group. We are here to help!

Berntson Porter is here to help businesses navigate these unprecedented times. Visit our Resource Center for up-to-date information about COVID-19 legislation that impacts you and your business.