New IRS Guidance on Payroll Deferrals Confirms that the Buck Stops with the Employer
On August 28, 2020, the IRS issued Notice 2020 – 65, which provided much-needed guidance related to the payroll tax deferrals enacted by President Trump’s August 8, 2020 Executive Order (the “Order”). As discussed in my prior post (available here), the language of the Order stated that payroll tax deferrals “shall be made available with respect to any employee the amount of whose wages or compensation, as applicable, payable during any bi-weekly pay period generally is less than $4,000, calculated on a pre-tax basis, or the equivalent amount with respect to other pay periods.” As explained in my prior post, an employee’s exercise of this deferral right now may result in him or her paying a larger tax bill in April 2021; therefore, we encourage employees to consult with their tax advisors before making the decision to defer.
Following issuance of the Order, many employees weighed the benefits of exercising this deferral option, and many tax practitioners scratched their heads. The obligation to withhold and remit payroll taxes belongs to the employer, not the employee, so it seemed to us tax nerds that an employer should be allowed to decide whether to provide its employees with the option to exercise their deferral rights under the Order. Steve Mnuchin informally confirmed this in an interview with FOX Business’ Maria Batiromo when he acknowledged that the government could not require employers to provide their employees with the option to defer payroll taxes. (You can find that interview here.)
Notice 2020 – 65 confirms that employers allowing their employees to defer taxes pursuant to the Order will indeed bear the ultimate responsibility for withholding and remitting payroll tax. It also confirms that any employment taxes deferred under the Order must be withheld and paid by the employer during the period beginning on January 1, 2021 and ending on April 30, 2021. If an employer does not withhold and pay all of the deferred tax due from its employees by April 30, 2021, interest, penalties, and additions to tax will begin to accrue on any unpaid amounts starting on May 1, 2021. It is important to note that payment of any interest, penalties, and additions to tax accruing on any taxes deferred under the Order and remaining unpaid as of April 30, 2021 will be the responsibility of the employer – not the employee(s) making the deferral election.
Additionally, an employer’s decision to allow its employees to defer payroll tax under the Order presents a number of other potential issues, including (but not limited to) the following:
- Employees Who Underwithhold: In a perfect world, employees would only make the decision to defer payroll taxes under the Order if they were certain they had paid in a sufficient amount to cover their tax obligation. In the real world, there is a risk that an employee may spend the deferred withholding amount and be underwithheld as of April 30, 2021. In that case, if the employee is still working for the employer, Notice 2020 – 65 provides the employer with the right to make arrangements to recoup any taxes due from the employee. While this may provide some comfort to an employer, it still places the administrative burden for accounting for recoupment of taxes (or advancing any taxes due as compensation to the employee) squarely on the shoulders of the employer.
- Former Employees Who Underwithhold: While Notice 2020 – 65 clearly states that an employer may make arrangements to recoup any taxes due from an employee, it does not state what happens if the individual deferring payroll taxes under the Order terminates employment prior to April 30, 2021. In this case, it is unclear whether an employer’s right to make arrangements to recoup any taxes due extends to former employees
- Impact on the Employer’s Paycheck Protection Program (“PPP”) Forgiveness Amount: Given the extension of the PPP application deadline to August 8, 2020, and the extension of the covered period for PPP loans to 24 weeks, it is very possible that the deferral period under the Order overlaps with the covered period for the employer’s PPP loan. While this may not be an issue for some employers, it may be an unpleasant surprise to those employers who had counted on including the employee portion of payroll tax withholdings during the covered period in their total forgivable payroll expense. Since the current PPP regulations state that the covered loan period for PPP loans may not extend any later than December 31, 2020, any deferred expenses paid during the period from January 1, 2021 to April 30, 2021 would not be includable in the loan forgiveness amount, since Notice 2020 – 65 does not require the employer to withhold and pay those taxes until 2021. If an employer is concerned about its ability to meet the requirement that 60% of the forgivable loan amount consist of payroll expenses, it may not be advisable to allow its employees to defer payroll taxes.
- Increased Risk of Personal Liability for Unpaid Payroll Taxes, Penalties, Interest, and Additions to Tax: In contrast to other types of taxes, the failure to remit payroll taxes can result in the assessment of Trust Fund Recovery Penalties (“TFRPs”), which are imposed upon any person “who is required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof.” See Internal Revenue Code Section 6672(a). Individuals meeting these requirements (which can include owners of the company, officers or employees entrusted with the responsibility to make sure payroll taxes are properly withheld and remitted, etc.) will be required to pay a TFRP equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over in addition to any other penalties assessed under law. For this reason, an employer’s failure to make timely payment of any deferred amounts due could result in assessment of a TFRP against the owner(s), officers(s) or employees of the employer who the IRS determines to be “responsible persons” for the purposes of properly withholding and remitting payroll taxes.
At the end of the day, our current advice to employers with respect to this deferral is the same as our current advice to employees: before making the decision whether to permit your employees to defer payroll taxes, consult with your tax advisor to determine whether the benefits outweigh the risks of doing so. While legislative or other action converting this tax deferral to a tax break through forgiveness of any deferred amounts could significantly change this analysis, we have not yet seen any indication that such legislation is on the horizon. If you would like to consult with a member of our Taxation Practice Group regarding this topic, you can find our contact information here.
DISCLAIMER: The information provided is for general informational purposes only. This post is not updated to account for changes in the law and should not be considered tax or legal advice. This article is not intended to create an attorney-client relationship. You should consult with legal and/or financial advisors for legal and tax advice tailored to your specific circumstances.