IRS Issues Guidance on Payroll Tax Deferral; NAFCU Annual Survey
A few weeks ago, we blogged about an executive order issued on August 8, 2020 that aimed to provide some relief relative to the ongoing COVID-19 pandemic by deferring certain payroll taxes. The Memorandum on Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster (Memo) in part, directed the Department of Treasury to exercise statutory authority to defer the withholding, deposit and payment of the employee portion of certain taxes, specifically Social Security payroll taxes. Currently, these taxes total 6.2% of an employee’s salary up to a certain salary cap that is adjusted annually for inflation. The memo defers these taxes between September 1, 2020 and December 31, 2020. However, the memo was not particularly prescriptive, and left open questions like whether this was mandatory, how the deferral may function and similar issues. On Friday, August 28, 2020 the Internal Revenue Service (IRS) issued Notice 2020-65 (Notice) that clarified some issues, but not others.
As a starting point, the Notice does not explicitly address whether employers are required to defer payroll taxes for eligible employees. However, some language in the press release seems to indicate this is voluntary. The Department of Treasury and the IRS described the Memo as “allowing employers to defer withholding and payment of the employee's portion of the Social Security tax if the employee's wages are below a certain amount…” (Emphasis added.) Additionally, shortly after the Memo published Secretary of the Treasury Steve Mnuchin made a television appearance that seemed to indicate this is not mandatory. Secretary Mnuchin said, in part, that regulators would “…create a level of certainty for employers that want to participate. We can't force people to participate…” While there is no explicit mandate in the Notice to defer these taxes, there is some consensus that it is still unclear how to handle requests from employees to defer the taxes. Since credit unions as employers are ultimately liable for the tax being paid, there seems to be agreement that this is not mandatory but credit unions may want to check with an accountant and/or counsel with expertise in tax issues for guidance.
For those credit unions considering deferring these payroll taxes, as a reminder, the Memo does not apply to all employees, but rather to employees who make under $4,000 every two weeks, calculated pre-tax (approximately $104,000 annually). According to the Notice, this is determined on a pay period-by-pay period basis. In other words, an employee may be below the $4,000 threshold for one pay period, during which the taxes could be deferred. However, if an employee exceeds the threshold in another pay period, such as when a commission is paid, those wages are not “applicable wages” eligible for the deferred taxes.
The Notice also clarifies when the deferred taxes would need to be repaid by the credit union – between January 1, 2021 and April 30, 2021. Any deferred amount that is still unpaid would begin to accrue interest, penalties and additions to the tax starting on May 1, 2021. If the payroll taxes are deferred, employees may face difficulties when double the payroll taxes are taken out for in the first few months of 2021 to repay the deferred amounts. Also, since employers are the taxpayer for these taxes, if a credit union defers these payroll taxes for an employee, and that person leaves the credit union in the interim, the credit union would still have to pay the owed taxes at the end of the deferment period. However, the Notice indicates that employers can “make arrangements to otherwise collect” the owed taxes from employees. These amounts just may not be easily collectible from a former employee depending on their circumstances.
If a credit union chooses to defer the taxes for eligible employees, there are many issues to consider including how to inform staff. While not required by the Notice, effective and clear communication to impacted employees may explain some issues like: how the payroll tax deferment works; that this is not forgiveness; and how/when the amounts will need to be repaid including how this would be handled if an employee leaves the credit union. These are just a few examples – other information may also be important to communicate as questions arise. Overall, this kind of messaging may help avoid confusion and prevent surprises come 2021. It may also help to remind employees that the deferred amounts will start being repaid prior to the first paycheck in 2021 where the deferred tax is going to be deducted.
One thing to note, the IRS did create a hotline to ask questions about this Notice, (202) 317-5436 which may be another route for credit unions seeking additional guidance on this issue. The Society for Human Resource Management (SHRM) has a compilation of resources from various law firms that may also be helpful. This law firm article includes some recommendations that may also be useful to consider.
We Need Your Help! NAFCU Annual Survey
In December, NAFCU’s Board of Directors will meet with Federal Reserve Board Governor Michelle Bowman and senior Federal Reserve staff. In preparation for the meeting, we need to know your opinion on a variety of topics, including compliance burdens and regulatory challenges. Your participation in this survey is very important, especially this year with the upcoming election and the unique challenges of COVID-19.
Programming Note: NAFCU’s offices will close early today and we’ll be closed on Monday in observance of Labor Day. We know the credit union compliance community works hard and hope you have a safe and relaxing weekend. We will be back to blogging on Wednesday!