IRS Issues Guidance on the Employee FICA Tax Deferral

One of the four Executive Orders signed by President Trump on August 8, 2020, relates to the deferral of “certain payroll tax obligations” in order to “put money directly in the pockets of American workers”. Simply put, the deferral relates to the 6.2% Employee FICA contribution on wages paid between September 1, 2020, and December 31, 2020, to employees whose gross pay in any bi-weekly pay period is “generally less than $4,000”. Because the Executive Branch does not have authority to forgive taxes, only to defer them, the order contains a provision stating, “The Secretary of the Treasury shall explore avenues, including legislation, to eliminate the obligation to pay the taxes deferred.”

On Friday, August 28, IRS issued guidance with respect to the deferral, but it leaves a number of questions unanswered. Here’s what the guidance clarified:

1. For “Affected Taxpayers”, 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, 2020. As a result, any FICA tax that would otherwise have been withheld from September 1 through December 31, 2020, must be withheld and submitted ratably over the period January 1 through April 30, 2021 (interest and penalties will accrue on unpaid balances beginning May 1, 2021). This will put many employees in the position of having approximately double the FICA tax withheld from their pay during the first four months of next year. Employers will have to track the amount of the tax deferred on the applicable 2020 wages, by employee, and deduct that amount equally over the 2021 pay periods through April 30.

2. The “Affected Taxpayers” are employers, not employees. Therefore, employers may choose to withhold the FICA tax from employees’ pay – or not, as Secretary Mnuchin acknowledged in a recent interview. If they choose to withhold, they may submit the tax in the normal course of business in 2020. If they choose not to withhold, they are responsible for submitting it in 2021. What happens if an employee is terminated before their total applicable tax is withheld? The liability remains with the employer. The IRS guidance states, “If necessary, the [Employer] may make arrangements to otherwise collect the total Applicable Taxes from the employee,” but does not provide any further details on the matter. Theoretically, if an employer pays the taxes on behalf of a terminated employee, the amount would be taxable income to the employee, on which additional payroll taxes would be due.

3. The guidance explained that the deferral applies to “Applicable Wages” – those paid for a bi-weekly pay period for an amount less than $4,000, as determined on a “pay period-by-pay period” basis. This means that an employee may qualify for the deferral in some pay periods, but not in others. As always, meticulous recordkeeping is critical.

The IRS guidance did not address the possibility of the deferral ultimately being forgiven, which begs the question of whether employees of companies who continued to withhold FICA will somehow be made whole if the taxes are forgiven. For a variety of reasons, it is uncertain whether forgiveness will actually occur, including the fact that it would literally take an Act of Congress.

In addition, the guidance did not address the impact on self-employed individuals. It appears that the deferral relates only to employment taxes, not self-employment taxes. However, the guidance was silent on the issue.

We recommend considering all the relevant facts and your company’s circumstances in determining the best course of action for your business and your employees relating to the payroll tax deferral. If you have questions about your unique situation, please reach out to your KatzAbosch representative, or contact us.

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