Client Alert: Employers Liable for Deferred Payroll Taxes

The Internal Revenue Service has issued guidance for employers who, in response to the President’s Executive Memorandum dated August 8, 2020, choose to defer payroll taxes for employees from September 1, 2020, through December 31, 2020. In Notice 2020-65, issued August 28, 2020, the IRS specified that the deferred payroll taxes are due to the IRS prior to May 1, 2021. Thus, employers must collect current payroll taxes, along with deferred payroll taxes, from employees during the period of January 1, 2021 through April 30, 2021. If the employer is not able to make the tax payments to the IRS during the first four months of 2021, the employer is subject to interest, penalties, and additions to tax as of May 1, 2021. The employer is directed to collect payroll taxes from its employees. However, if said deferred payroll taxes are not remitted to the IRS, the taxes are ultimately the liability of the employer, not the employee.

This payroll tax deferral is only available for employees whose bi-weekly compensation is $4,000 or less, or approximately $100,000 per year. If employees for whom payroll taxes were deferred are no longer employed by the same employer in 2021, the deferred tax remains the employer’s obligation. The payroll taxes are generally the taxes withheld for Social Security and Medicare. Internal Revenue Code §3101 and §3201 impose a 6.2% withholding tax for Social Security and a 1.45% withholding tax for Medicare. Railroad Retirement withholding, for those in the rail industry, is also included in this voluntary tax deferral.

While most employers have decided against modifying employee’s withholding taxes during the final four months of 2020, this is fair warning for those who do provide their employees with tax deferral that ultimately the IRS will look to the employer for the deferred payments. As is always the situation, if the employer is not able to pay employment taxes the 100% penalty applies to the employer’s “responsible persons”, generally those controlling the employer’s finances. Those responsible persons are jointly and severally personally liable for employment taxes, which the IRS aggressively collects. This is also fair warning to employees, subject to these rules, that their paychecks will be noticeably smaller during the first four months of 2021.