Moratorium on Collecting Employee Payroll Taxes – To Collect or Not to Collect Now, That is the Question
Moratorium on Collecting Employee Payroll Taxes – To Collect or Not to Collect Now, That is the Question
The President directed the Secretary of the Treasury to use his authority to postpone the period of collection on applicable wages beginning on January 1, 2021 and ending on April 30, 2021, and subsequently, Secretary Mnuchin confirmed that the deferral is voluntary and employers may continue to withhold and deposit employee Social Security taxes in accordance with their normal schedule. Employers were unsure how to proceed. The IRS finally released guidance on the employee Social Security tax deferral on Friday, issuing IRS Notice 2020-65[1], which confirms that employers may defer the withholding, deposit, and payment of certain payroll tax obligations. But, should you?
Employee Applicable Wages
Does the employee make too much money to qualify? Only employees making less than $4,000 in biweekly Applicable wages or Compensation may qualify. Applicable wages as defined in section 3121(a) or Compensation as defined in section 3231 (e) paid to an employee on a pay date during the period beginning on September 1, 2020 and ending December 31, 2020, may be deferred, but only if the amount of such 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. If employers do not pay employees bi-weekly, then the employer must do the math.
And, IRS Notice 2020-65 clarifies that the determination of whether an employee is eligible for the deferral of the employee’s share of Social Security taxes applicable wages is made on a pay period-by-pay period basis. If in the following pay period, the employee’s wages exceed the threshold, the employee’s share of Social Security taxes must be deposited timely. So, get your calculators out.
Employer Responsibility
An Affected Taxpayer must withhold and pay the total Applicable Taxes that the Affected Taxpayer deferred under this notice 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, with respect to any unpaid Applicable Taxes. If necessary, the “Affected Taxpayer” may make arrangements to otherwise collect the total (deferred taxes) from the employee. In other words, unless legislation is enacted to forgive the uncollected taxes, the employer is not relieved of the obligation to collect, deposit and pay the taxes from future Applicable wages or Compensation. And, the employer remains liable for the payment of the deferred taxes regardless of whether the employer can collect the deferred taxes from the Taxpayer. What if the employee is terminated or leaves your employment?
Departing Employees
Employers should carefully consider the risk that employees will terminate their employment (or be terminated) before the deferred taxes are collected. If an employer elects to defer the withholding of an employee’s Social Security tax and the employee leaves before the taxes are withheld, the employer remains liable for the employee’s share of taxes. This could potentially cost the employer a substantial loss if the employer finds it difficult to collect from the employee later.
You can guess that most of Epps & Coulson, LLP’s clients (and most payroll services also advise) are avoiding “deferring” and carry on as usual in order to avoid these problems, but some companies feel helping their struggling employees may be worth the risk.
Changes to Form 941 Previously Revised for (COVID-19)
If you do defer, note that the IRS released a draft version of a revised Form 941, for (Covid-19) related employment tax credits and other tax relief. And, while instructions for form 941 can be found online at www.IRS.GOV[2], the new instruction is to not use the April 2020 revision of Form 941 to report employment taxes for the first quarter of 2020 and to use the January 2020 revision of form 941 to report employment taxes for the first quarter of 2020. Why? Drafts are subject to change and these are continuing to be changed.
What About the Employer Portion of Employee Taxes?
FICA Tax is a combination of 6.2% Social Security and 1.45% Medicare tax that the IRS imposes on employee earnings. Under the payroll tax deferral relief offered by the previously issued CARES Act, employers can defer the 6.2% employer portion of the Social Security Tax component for (only) the first $137,700 of earnings. The deferral period began on March 27, 2020 and will end on December 31, 2020. Employers must then pay the deferred payroll tax amount in no more than two installments, half by 12/31/2020, and the remaining half by 12/31/2021. There is no earnings cap on the Medicare portion of FICA, for which employers and employees separately pay a 1.45% wage tax, but the COVID-19-related payroll tax relief applies only to the Social Security portion of FICA. See IRS Notice 2020-22[3] and a series of IRS FAQs[4] for more details. Or, for more information feel free to contact Dawn: dcoulson@eppscoulson.com.
EPPS & COULSON, LLP
Attorneys admitted to practice in
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Information contained in this Memo is intended for informational and educational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney. While intended as informational and educational, it is considered advertising under various applicable laws of some states, and as such, Epps & Coulson, LLP encourages you to call us or another qualified attorney to discuss these matters as they apply to you or your business.
[1] https://www.irs.gov/pub/irs-drop/n-20-65.pdf
[2] https://www.irs.gov/pub/irs-dft/f941–dft.pdf
[3] https://www.irs.gov/pub/irs-drop/n-20-22.pdf
[4] https://www.irs.gov/newsroom/deferral-of-employment-tax-deposits-and-payments-through-december-31-2020