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IRS Guidance on Payroll Tax Deferral Says Employees Must Pay It Back in 2021

Chris Gaetano
Published Date:
Aug 31, 2020

New guidance from the IRS on the payroll tax deferral created via executive order on Aug. 8 says that employees are ultimately responsible for paying back the deferred tax, through employer withholding, once the deferral period is over. The guidance refers repeatedly to the "Affected Taxpayer," meaning the employer. It states that for affected taxpayers, the due date for the withholding and payment of the tax imposed by IRS Code Section 3101(a) on 'Applicable Wages'—defined as wages paid to an employee between Sept. 1, 2020, and Dec. 31, 2020, but only if the amount of such wages is less than the $4,000 for a bi-weekly pay period—is postponed until the period beginning on Jan.1, 2021, and ending on April 30, 2021.

According to CNN Business, if companies opt to take this approach, the payroll taxes will be deferred until Jan. 1. At that time, companies will withhold taxes from paychecks in larger amounts so employees can pay back what they owe.

The guidance placing the onus on the employee to pay back the taxes represents a victory for the Treasury Department over the Oval Office, which wanted to make the employer responsible for paying back the taxes, according to Bloomberg. The executive order had left open the possibility of forgiving the deferred tax later on, said CNN Business, but only Congress has the power to waive taxes, so all the order could do was postpone when the taxes are due. Bloomberg noted that putting the burden on employees would likely be politically unpopular, as few would appreciate having to pay the taxes that are normally deducted in smaller amounts from their paychecks in larger amounts next year.

It is this exact setup that led a coalition of businesses groups, including the Chamber of Commerce, to call the plan "unworkable," as they said it will create such a substantial tax liability at the end that most businesses will just ignore the order altogether.

Outside of concerns about the participation rate, others have questioned the measure's effectiveness by noting that, even if businesses implemented the deferral on a wide scale, its main beneficiaries would be those who already have jobs, rather than the tens of millions who lost their jobs over this past year and have yet to find another.

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