Payroll Tax Deferral IRS Guidance
UPDATE: IRS Guidance Issued
Late Friday, August 28, 2020 the Treasury issued guidance on President Trump’s executive order deferring the payment of certain employee payroll taxes. The period eligible for deferral is September 1, 2020, and ends December 31, 2020. This deferral is only available for those earning a bi-weekly pay period of less than $4,000 threshold amount.
The determination of the applicable wages is made on a pay period basis. If the amount of wages or compensation payable to an employee for a pay period is less than the corresponding pay period threshold amount, then that amount is considered applicable wages eligible for deferral of the employee share of social security tax. An Affected Taxpayer must withhold and pay the deferred taxes ratably from wages paid between January 1, 2021, and April 30, 2021, or interest, penalties, and additions to tax will begin to accrue on May 1, 2021, on any unpaid balance.
The guidance is very limited; it doesn’t discuss what happens if the employee terminates employment nor does it provide any insight on what happens if employee earnings post deferral date aren’t enough to cover the taxes. The guidance can be found in IRS Notice 2020-65.
As the clock clicks down to the September 1 deadline, there is still no guidance from the IRS on President Trump’s payroll tax deferral directive.
Employers are finding it difficult to move forward with implementation when they don’t fully understand their responsibilities related to the deferred taxes. Currently, there has been no change in the law that relieves the employer of the responsibility to withhold and pay these taxes.
Most employers that have had to deal with payroll taxes have been warned of the seriousness of handling funds withheld from an employee’s paycheck. After all, this is not the employer’s money, it belongs to the employee and the employer is trusted to remit it to the appropriate taxing authorities. For those employers that don’t meet their obligations, they risk substantial Trust Fund Recovery Penalties. Penalties can be assessed against any person who is responsible for collecting and paying withheld income and employment taxes and willfully fails to collect or pay them. Per IRS guidance, a responsible person is a person or group of people who have the duty to perform and the power to direct the collecting, accounting, and paying of trust fund taxes. This person may be:
- An officer or an employee of a corporation
- A member or employee of a partnership
- A corporate director or shareholder
- A member of a board of trustees of a nonprofit organization
- Another person with authority and control over funds to direct their disbursement
- Another corporation or third-party payer
- Payroll Service Providers (PSP) or responsible parties within a PSP
- Professional Employer Organizations (PEO) or responsible parties within a PEO
- Responsible parties within the common law employer (client of PSP/PEO)
For willfulness to exist, the responsible person:
- Must have been, or should have been, aware of the outstanding taxes and
- Either intentionally disregarded the law or was plainly indifferent to its requirements (no evil intent or bad motive is required)
Using available funds to pay other creditors when the business is unable to pay the employment taxes is an indication of willfulness.
Treasury Secretary, Steven Mnuchin, has stated that it is not mandatory for employers to participate in the deferral and many large employers have stated that they will not stop withholding until IRS guidance is provided.