Breakdown from Wisconsin Manufacturers and Commerce regarding the Payroll Tax Executive Order:
Internal Revenue Service Releases Guidance on President’s Payroll Tax Executive Order
On August 8th, the President signed an executive order (Order) temporarily delaying the withholding, deposit, and payment of the employee contribution of Social Security payroll taxes from September 1st through December 31st 2020.
The Social Security payroll tax is 12.4 percent levy split evenly between employers and employees, however the deferral only applies to the employee’s portion of the tax.
The Internal Revenue Service (IRS) released IRS Notice 2020-65 (Guidance) on Friday, August 28th.
This update is meant to answer questions members have asked about the Order.
Is deferral mandatory?
Neither the Order or the Guidance explicitly state the deferral is mandatory. Public statements have been made by Treasury Secretary Mnuchin that the payroll tax deferral is voluntary saying “we can’t force people to participate.”
Further, the Guidance does not mention any option for employees to make the election to defer. It appears the decision is left to the employer.
To defer or not to defer?
If the employer does choose to defer withholding the payroll tax during the time period specified in the order (September 1st – December 31st, 2020), then the employer must later withhold the deferred amount “ratably” from wages and compensation paid between January 1 – April 30, 2020, or interest, penalties, and additions to tax will begin to accrue on May 1, 2021.
The Guidance does not discuss what an employer must do if an employee does not have sufficient wages in the first four months of 2021 (i.e. the employee took a leave of absence or terminated employment) to accomplish the required deductions from the previously deferred tax. All the Guidance says is, “If necessary, the [employer] may make arrangements to otherwise collect the total Applicable Taxes from the employee.”
If an employer chooses not to defer withholding the employee portion of the payroll tax, then the employer is required to withhold the tax and deposit it with the Treasury.
Can an employer defer for part of the period?
The Order and Guidance is silent on whether an employer can choose to defer withholding the tax for a portion of the deferral period between September 1 – December 31, 2020.
How is the maximum wage limitation applied?
The maximum wage limitation, defined in the Order as less than $4,000 in bi-weekly wages or compensation on a pre-tax basis or equivalent amounts for other pay periods ($104,000 annually).
The Guidance elaborates on this limitation, by stating the Maximum Wage Limitation is separately determined for each employee in each payroll period. So if in a bi-weekly payroll period the employee’s pay exceeds $4,000 then the payroll tax must be withheld.
You can read the entire executive order here: https://www.whitehouse.gov/presidential-actions/memorandum-deferring-payroll-tax-obligations-light-ongoing-covid-19-disaster/
You can read the IRS guidance here: https://www.irs.gov/pub/irs-drop/n-20-65.pdf
This information comes specifically from Cory Fish, General Counsel & Director of Tax, Transportation and Legal Affairs, Wisconsin Manufacturers & Commerce. As always the Chamber thanks WMC for their hard work and great relay of information.