Employee Payroll Tax Deferral Guidance Issued
In early August, the news reported attempts between Congress and the White House to deal with additional Coronavirus relief legislation. After several meetings between the two sides, it was clear no agreement would be reached, leaving many without critical unemployment and other financial benefits. To help address the situation, President Trump signed Executive Orders addressing various topics, including the opportunity for employees to defer payroll taxes to increase take-home pay. The Order stated that employees could begin deferring these taxes starting on September 1, 2020. Still, New Jersey businesses’ main challenge has been the lack of guidance needed to implement changes. The good news is that on August 28 2020, the IRS released Notice 2020-65, which provides essential details including eligibility, tax repayment timeline, and withholding and collection responsibilities. To help clients, prospects, and others, Klatzkin has provided a summary of the key information below.
Which Taxes Can be Deferred?
The payroll taxes paid by an employee each pay period are typically noted as Federal Insurance Contributions Act (FICA) withholding. Although often presented as a single item, it consists of two separate taxes, including the 6.2% Social Security tax and the 1.45% Medicare tax. Only the employee portion of the Social Security tax can be deferred as the Medicare tax is not eligible.
Who Can Participate?
The guidance uses the term Applicable Wages to describe the pre-tax compensation and wages which meet the established threshold. It states that any salaries and compensation paid in a bi-weekly pay period cannot exceed $4,000 ($104,000 annually) to meet the threshold. For compensation paid in other pay periods, the equivalent amount must not be exceeded.
In determining which employees can participate, it is important to note the threshold must be evaluated on a pay-period by pay-period basis. In other words, eligibility must be continually evaluated based on the pre-tax wages and compensation earned by an employee.
When do Taxes Need to be Repaid?
Although forgiveness was mentioned in the Executive Order, the guidance does not mention the topic at all. As such, deferred payroll taxes must be repaid ratably between January 1, 2021, and April 30, 2021. If outstanding taxes are still owed after this date, interest and penalties will begin to accrue starting on May 1, 2021. This means that those who participate will receive smaller paychecks due to the need to repay taxes according to the above time period.
Who is Responsible to Pay Taxes?
Although the individual employee’s wages are the basis for the tax, the guidance uses the term, Affected Taxpayer to identify the business as being responsible for withholding, collecting, and remitting the deferred taxes. This means the employer must ensure the proper amounts are taken from payroll to make repayment. The challenge for many New Jersey businesses is the guidance does not provide any details about what will happen if an employee leaves the company or does not generate enough compensation to make the repayment by April 30, 2021? The guidance designates the employers as the affected taxpayer, therefore, employers can decide whether or not they choose to implement the Social Security Tax Deferral.
Contact Us
While the current guidance provides important details, unfortunately, many questions remain. Employers should consult their tax advisors to determine how to proceed with implementation. If you have questions about the material outlined above or need assistance with another accounting or tax-related issue, Klatzkin can help. For additional information, click here to contact us. We look forward to speaking with you soon.
©2020 Klatzkin & Company LLP. The above represents our best understanding and interpretation of the material covered as of this post’s date. The content should not be construed as accounting, tax, or financial advice.