September 1 marks the day the President’s executive memorandum on payroll tax deferral is effective. On Friday, the IRS and Treasury issued guidance related to the memorandum. This gave employers, employees, and payroll processors one business day to digest the guidance and begin to make changes to accommodate the new rules. The guidance issue was essentially the bare minimum that could be provided and leaves many questions to be answered. I’ll ask some questions as I cover what was included below.
The due date for the withholding and payment of the deferred payroll taxes is postponed until the period beginning January 1, 2021 and ending on April 30, 2021.
Wages are defined in various sections of the IRS code (Section 3121(a) and 3231(e). The deferral is effective for pay dates beginning on September 1 and ending on December 31, 2020.
The deferral only applies if the amount of wages paid for a bi-weekly pay period is less than $4,000, or the equivalent threshold amount with respect to other pay periods. The determination of wages is made each pay period.
It is extremely unlikely that employers or payroll processors will be able to make the changes required in various payroll systems to accommodate these new rules before the first couple payrolls are issued in September and into October. This will create more work for small businesses as they will have to calculate and withhold amounts for whatever catch-up periods that exist.
Questions I Have
There are no penalties noted in the guidance issued for non-compliance. Does this mean the deferral is optional for employers?
What about the employee? Do they have any say in this? Can they control their paycheck or not?
Where does the burder fall as it relates to education? Employees will receive slightly larger paychecks for the rest of this year; however they will receive smaller checks in the first four months of 2021.
Payment of Deferred Payroll Taxes
Employers must withhold and pay the total applicable taxes that have been deferred between January 1, 2021 and April 30, 2021.
Questions I Have
What happens if an employee leaves an organization? It is clear the employer is responsible for collecting deferred payroll taxes in the first four months of 2021. If the individual is no longer an employee, how is the employer supposed to collect deferred taxes?
In summary, there are far more questions than answers related to this memorandum. Small businesses are put in a very difficult position by a government program, again. I expect many businesses to simply ignore this memorandum due to the administrative burden it will cause. Others will try to follow it to the best of their ability and take on the exposure that it creates.
It is difficult for me to advise small businesses to comply with this memorandum or any other new government program without final guidance issued. It seems we are in the habit now of asking small businesses to fly blind.
My recommendation is to get in touch with your payroll provider to ensure you understand what they are doing to help accommodate the new program in their system. Also, watch for more guidance that comes out on this topic. You may find it on the IRS website or potentially the US Treasury website. Finally, start communicating with your employees. They should be made aware of the program and your knowledge of it.
We will continue to provide updates as new information becomes available.