IRS issues guidance on payroll tax deferral
Tuesday, September 8, 2020

IRS issues guidance on payroll tax deferral

By Payroll and Entitlements Editorial Staff

The IRS has issued guidance on the President’s executive order on the deferral of payroll taxes. The order cuts the employee portion of payroll taxes through the end of the year. The cut applies to Federal Insurance Contributions Act (FICA) and Railroad Retirement Tax Act (RRTA) taxes. It does not apply to withheld federal income tax. FICA refers to the combined taxes withheld for social security (6.2%) and medicare (1.45%). However, note that the directive does not refer to, nor apply to, Code Sec. 3101(b) which covers the medicare tax (1.45%) (see, Payroll Management Guide Report Letter 2664, August 19, 2020).

The guidance states that employers that are required to withhold and pay the employee share of social security tax are affected under the order. The due date for the withholding and payment of the tax is postponed until the period beginning on January 1, 2021, and ending on April 30, 2021. According to the guidance, the deposit obligation for employee social security tax does not arise until the tax is withheld. Accordingly, by postponing the time for withholding the employee social security tax, the deposit obligation is delayed by operation of the regulations. Thus, the notice does not separately postpone the deposit obligation.

Applicable wages. “Applicable Wages” means wages as defined in IRS Code Sec. 3121(a) or compensation as defined in section Code Sec. 3231(e)(3) paid to an employee on a pay date during the period beginning on September 1, 2020, and ending on December 31, 2020, but only if the amount of such the wages or compensation paid for a bi-weekly pay period is less than the threshold amount of $4,000, or the equivalent threshold amount with respect to other pay periods. The determination of Applicable Wages is made on a pay period-by-pay period basis.

Payment of deferred taxes. Employers must withhold and pay the total taxes that the were deferred ratably from wages and compensation 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 taxes. If necessary, employers may make arrangements to otherwise collect the total taxes from the employee. (IRS News Release, IR-2020-195, August 28, 2020; IRS Notice 2020-65, August 28, 2020).

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