The IRS Guidance on Payroll Tax Deferrals

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Published on 09/07/2020

The COVID-19 pandemic has toppled the world, and the immediate impact for the exchequers is that they’re staring at a massive shortfall in their revenue earnings. The severity of the situation has to lead to myriad extensions of tax return filing and payment deadlines.

The Internal Revenue Service (IRS) is a Government Agency in the United States formed with the purview of systematic collection of taxes and regulatory enforcement of federal statutory tax laws of the United States. It services the taxation of all American individuals and companies by assisting the country’s taxpayers and. It also aids in pursuing and resolving instances of erroneous or fraudulent tax filings.

A Payroll Tax is distinct from the traditional Income Tax as the Government utilizes it for specific programs, unlike the Income Tax, which directly goes into the Government’s general fund at the U.S Treasury. Payroll tax is a tax that is withheld from an employee’s salary by an employer and remitted to the Government authorities on their behalf. This tax is used to finance social insurance programs like Social Security, Medicare, and unemployment insurance. The collection and delivery of such taxes into the Treasury rests with the employers solely and is not levied on contract employees but only permanent ones. The salary in this regard comprises not only the basic wages but also the benefits and tips being availed by the employees. Indeed, income from investments does not form a part of the base.

The tax is imposed at the federal and state levels, and it forms a considerable part of the total tax revenue – it almost accounted for 70% of federal revenue in FY 2017-18 when out of $3.42 trillion being paid into the Treasury, an enormous $2.39 trillion was transmitted by employers for the employment taxes.

The IRS Guidance

In an attempt to consider ways to shore up the economy in the face of the crisis, the President laid out the path to defer the total payroll tax of the employee’s share for the remainder of the year. The main driving force behind this idea is only to infuse liquidity into the markets as the suspension, for the time being, would accrue to the workers in the form of higher wages.

The payroll tax under the FICA (Federal Insurance Contributions Act) comprises of the Social Security tax at 6.2 percent and Medicare tax at 1.45 percent as for the employee, subject to certain limits. The benefit of deferring the payment would apply to the Social Security portion of employee wages only.

Legal Position: The deferral is restricted 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 concerning other pay periods.” That generally works out to a restriction on those making more than $100,000 annually.

The Shortfall in the Guidance

The companies and organizations were already quite skeptical about the payroll tax deferral and were seeking answers to quite many questions after the President issued the Directive. The delay in the Treasury’s guidance just added to the pain as it came only two business days before the deferral period. The deferral period was planned to start on 1st September this year, hardly leaving any substantial time for employers to reconfigure payroll systems and implement the change potentially. The guidance clarified that the short deferral of the tax was not elimination, but only a postponement of the tax and would leave employers on the brink of paying it all up in early 2021.

The articulation which is to be comprehended here is that the deferral would only be for a limited few months. It will reduce the paychecks that the employees would take home. The reason is that the deduction of payroll taxes would go up or almost be doubled. The net result is that the odds of many employers participating is low, as they get only between January to April 2021 to pay back the deferred taxes without any interest or penalties. Since this implementation has become challenging, it is music to the ears of the ones who were wondering whether the President is contemplating defunding Social Security. In simpler terms, it is highly unlikely that the payroll tax deferral will impact the Social Security trust fund.


The initiative is going to see a low opt-in rate by employers due to its lack of feasibility and viability. Employees, on the other hand, may participate as it would leave income in their hands at the time when they need the most. All in all from the Government’s perspective, there is a risk of incorrect payroll tax payment schedule and incorrect payment posting apart from the classification of employees as contractors, underreporting of liabilities, and the overall delay in collection of revenue.

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