There have been many questions on the 2020 Payroll Tax Deferral and how it works. The initial description of the deferral was confusing but IRS notice 2020-65 explains how the deferral works.
The key facts to keep in mind are that the IRS notice 2020-65 allows employers to stop withholding Social Security payroll taxes from paychecks from September 1 2020 through December 31, 2020. However, this is a deferral and the employee will be responsible for paying this payroll tax back in 2021.
Before delving into the detail: we recommend NOT deferring these taxes. The complexity of paying them back makes this an unattractive option.
Now, getting to the details, here is a summary of IRS Notice 2020-65:
Payroll tax deferral:
- Any employee who makes less than $4,000 pre-tax wages in a bi-weekly pay period qualifies to have their Social Security Tax (6.2%) deferred.
- The deferral covers paychecks starting on September 1, 2020, and the deferral ends on December 31, 2020.
- This deferral enables employees to keep more of their money during the defined pay periods.
- The determination for the $4,000 wage limit is done on a bi-weekly pay period basis. This means that an employee could qualify for deferral during some pay periods and not others, depending on the pay amount during a given period.
Payroll tax repayment:
- Employers must pay deferred taxes no later than April 30, 2021. Otherwise, penalties and interest will start to accrue on taxes owed.
- Employers will need to increase the employee social security tax for current employees between January 1, 2021 and April 30, 2021 to recover the amount deferred during 2020. This means that employees can expect reduced paychecks in 2021 to repay the deferred taxes.
- For employees who are no longer with a business and had taxes deferred, the employer will need to make arrangements with the employee to recover the deferral amounts (details pending on this process).
Items awaiting clarification:
- The process to collect former employees’ deferred taxes.
- The type of recordkeeping or other items required for compliance on this deferral.
If you have any questions, be sure to contact us. We are here to help!