New federal payroll tax holiday a go, confirms IRS in new notice

Mere days before the new payroll tax holiday was set to kick in, IRS finally weighed in. IRS Notice 2020-65 gives employers their marching orders … well, sort of.

You’re responsible for collecting – and ultimately paying back – any deferred payroll taxes established by President Trump in a presidential memorandum.

Unfortunately, the notice came without many details. And without the direction, many of your peers plan simply not to follow it!

In fact, we recently surveyed CFOs and asked them if they planned to implement the deferral on Sept. 1.

Not a single one said yes.

Two-thirds of your peers said the only way they’d get to work on this was with insight from IRS.

Which means the scramble is on for your Payroll team, if your company chooses to implement the deferral. Here’s how to get in compliance quickly.

Who’s eligible for the payroll tax holiday

First, you’ll want to determine which of your employees are eligible for this payroll tax holiday.

To qualify, an employee must earn less than the $4,000 threshold amount for a bi-weekly pay period.

So Payroll will need to run a report ASAP, and do so each pay period, to get a list of employees entitled to the break on the employee portion of Social Security tax. And the holiday lasts from September 1 through December 31.

Unfortunately, that’s about all employers got in the way of guidance. The two-and-a-half page IRS notice doesn’t offer anything in the way of implementation instructions.

Payroll pros know that deferring employees’ taxes would create several headaches, from scrambling to update systems to figuring out how to require employees to repay the taxes in the new year.

Then there’s the question of how to handle tracking the deferred tax so the right amount can be repaid. Also, what should employers do if employees leave their companies before their tax liability is repaid?

Not only could employers be left holding the bag for these unpaid taxes, they’d also be out the money and time spent to implement processes and procedures to suspend withholding.

Because of all the uncertainty and confusion surrounding the tax holiday, several stakeholders are calling for more guidance from the feds.

It’s on you to repay the deferrals

And you have penalties on the line when you have to pay that money back.

Notice 2020-65 made one other thing clear: Your company is expected to repay those taxes in the new year. So you’ll have to withdraw extra tax from employee paychecks in the new year to make it up.

All the money you would have put aside in the final third of 2020 will need to be repaid to the government during the period beginning Jan. 1, 2021 and ending April 30, 2021.

You don’t want to miss that date. Interest, penalties and “additions to tax” will begin to accrue on May 1, 2021, says IRS.

There is some hope that Congress will include forgiveness of this liability in the next round of stimulus. After all, this whole payroll tax reprieve came about while Congress continued to duke it out over a new round of stimulus.

Stay tuned.