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As discussed in an earlier Chamberlain Tax Blawg, on August 28 Treasury issued Notice 2020-65 which defers the due date for withholding, deposit and payment of employee-side taxes imposed under Section 3101(a) (FICA) and corresponding taxes under Section 3201 (RRT). Since the issuance of this Notice, there has been much commentary – in addition to consternation and hand-wringing on the part of clients – about a multitude of issues the Notice implicates.
On September 8, the Texas Society of Certified Public Accountants added to this chorus with a comment letter to Treasury and the IRS, and the letter in its entirety is worth reading. It raises very practical, real-life questions that employers and their accountants continue to grabble with, and suggests changes to the deferral program that should be taken seriously. Here is a spoiler alert on two items raised in the letter.
First, the letter requests that Treasury and the IRS issue an authoritative document that expressly confirms that the deferral is optional for employers. The IRS has implied in documents that the program is not mandatory. The Notice was accompanied by a release (IR-2020-195) which says that the deferral program is “allowing employers to defer withholding and payment.” The Notice itself postpones “the due date,” which suggests that employers have up until the extended due date, not that employer must wait until the extended due date. More importantly, the statutory basis on which the Notice is issued is Internal Revenue Code section 7508A, which authorizes Treasury to “postpone certain deadlines.” Arguably, this authorization does not empower Treasury to prohibit taxpayers from withholding and remitting taxes within the pre-extension deadlines. Additionally, the IRS has orally confirmed that the deferral program is not mandatory for private employers to implement. Bottom line is that there is a growing consensus and level of comfort that employers may opt-out of the program, nevertheless it would be ideal if the IRS issued written, authoritative confirmation that the growing consensus is correct.
Second, and more noteworthy, are the detailed proposals that the Texas Society of Certified Public Accountants propose. This includes a set of proposals that would mitigate the risk to employers that they are left bearing the cost of employee-side taxes for employees that leave the company after their payroll taxes have been deferred but before the employee evens up with additional withholdings in the first four months of 2021. Of course, if the deferred taxes are ultimately forgiven, this may be a non-issue. But without a crystal ball to know whether the taxes will be forgiven, employers and their advisors have reason to be concerned. Several of the elements in the Texas Society’s letter to mitigate this risk involve having employees sign form letters that the IRS would respect as relieving the employer from liability and affirming that the employee will even up with the IRS in 2021. It would also involve “requiring employers to report the deferred amount of taxes in Box 12 of Form W-2 (with a new code) and in Box 3 of the Form W-2, the compensation amount on which taxes are deferred.” They further recommend that the proposed IRS guidance “state that employees are required to pay the deferred amount as an additional tax payment on their applicable federal income tax return.”
The program set forth in Notice 2020-65 has to date received a cool reception from employers. If the IRS adopts recommendations similar to those contained in the Texas Society of Certified Public Accountants’ September 8 letter, many employers may warm to the concept of a short-term deferral of their employees’ payroll taxes.