In response to the COVID-19 pandemic, the Internal Revenue Service (IRS) has recently released additional guidance on President Trump’s Executive Order regarding deferred payroll taxes. According to Notice 2021-11, the repayment period for employers who elected to defer certain employee taxes is extended. As a result, employers can withhold and pay deferred payroll taxes throughout 2021 instead of just the first four months of the year.
Factors Leading to Deferred Payroll Taxes
In response to the coronavirus recession, last fall the Trump administration issued an order permitting the postponement of deadlines for withholding, depositing, and paying certain employment tax obligations. Given the Internal Revenue Code provision that permits the postponement of certain specified deadlines due to Presidentially declared disasters, this order was introduced to reduce the severe consequences of COVID-19 for US employees.
Employees and employers each pay half of the total 12.4% Social Security tax due for each worker, but the Executive Order allowed the deferral of the employee’s share of Social Security for the period of September 1, 2020, through December 31, 2020, for certain employees. At the same time, the Order did not call for the deferral of the employee’s share of Medicare tax on wages. The deferred payroll taxes only applied to employees earning less than $4,000 on a biweekly basis or about $104,000 annually.
On August 28th, the Treasury Department released Notice 2020-65 in order to provide guidance on deferred payroll taxes. The Notice specifically addressed the inability to forgive these deferred taxes, indicating that absent Congressional action the deferred payroll taxes would not be forgiven and would instead be due at a later date.
The Notice specifically stated that taxes were only deferred until January 1, 2021, at which time repayment procedures were set to begin and that employers who choose to defer the payroll taxes will have an obligation to repay those deferrals by April 30, 2021, or be subject to penalties and interest. Also, the Notice allowed employers to make arrangements to otherwise collect taxes from the employee, to prepare for situations in which employees terminate employment before the deferred payroll taxes can be collected.
The Consolidated Appropriations Act and Notice 2021-11
The Consolidated Appropriations Act of 2021 was signed into law on December 21, 2020. The Act contains both the COVID-Related Tax Relief Act of 2020 (COVIDTRA) and the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (TCDTR). In addition to providing for stimulus payments of $600 per taxpayer and qualifying child, the Consolidated Appropriations Act also contains numerous tax provisions and extenders.
One of the changes introduced in the Act is the extension of repayment of deferred payroll taxes on wages earned during the period of September 1, 2020, through December 31, 2020. Specifically, the Act extended timeframes so that taxes that have been withheld may be repaid, ratably, between January 1, 2021, and December 31, 2021. Also, according to the Consolidated Appropriations Act, penalties and interest will not begin to accrue on any unpaid amounts until January 1, 2022.Find out how to manage your tax obligations, remain compliant with constantly changing tax regulations, and avoid costly penalties with this comprehensive payroll tax guide.
In connection with this extension, the IRS released Notice 2021-11 which changes some of the key elements of Notice 2020-65. Per Notice 2020-65, any taxes deferred would be withheld and paid ratably from employee wages between January 1, 2021, until April 30, 2021. This deadline was extended until December 31, 2021, and Notice 2021-11 now formally reflects this updated period, modifying the original language of Notice 2020-65. Thus, repayment of any deferred payroll taxes must be completed by December 31, 2021. However, payments made by January 3, 2021, will be considered timely because December 31, 2021, is a legal holiday. Penalties, interest, and additions to tax start on January 1, 2022, for any unpaid balances.
Risks Associated with the Deferred Payroll Taxes
While deferring certain employee payroll taxes was designed to reduce financial strain caused by the COVID-19 pandemic, this imposes significant responsibilities and potential liability on employers. For example, it is unclear what mechanisms may be available or allowable to compel payment from former employees, or employees with reduced wages on which to withhold. Furthermore, if an employer cannot collect any remaining deferred taxes from an employee, the obligation to repay remains with the employer.
Deferring payroll taxes may help an employer in the short term, but when the deferred taxes come due, some businesses may not be able to pay them. Accordingly, employers should carefully consider their potential obligations and risks before deciding to defer withholding on behalf of their employees.
Whether implementing payroll tax deferral or not, employers should consider communicating their decision to employees. However, this creates an additional administrative step in an already complex payroll systems change. To simplify the adjusting of payroll systems and repayment of deferred payroll taxes, employers should consider outsourcing payroll tax management. This approach leaves little or no place for errors, helps them stay ahead of constantly changing tax regulations, minimize payment compliance risks, and reduce additional expenses.Outsource payroll tax management to avoid mistakes and tax compliance penalties, achieve cost savings, and ensure compliance with complex payroll requirements.