IRS Issues Notice 2020-65 Providing Guidance on Employee Social Security Tax Deferral

Late Friday, the IRS released Notice 2020-65 providing guidance to employers regarding the implementation of President Trump’s presidential memorandum issued on August 8, 2020.  The memorandum directed the Secretary of the Treasury to defer the withholding, deposit, and payment of employee Social Security taxes for the period from September 1 to December 31, 2020 (see earlier coverage of the presidential memorandum).  Shortly after the memorandum was released, Secretary Mnuchin confirmed that the deferral is voluntary and that employers may continue to withhold and deposit employee Social Security taxes in accordance with their normal schedule (see earlier coverage of Sec. Mnuchin’s confirmation that deferral is voluntary). Continue Reading

IRS Warns Employers Claiming New Tax Credits of Erroneous Penalty Notices

The IRS recently announced that it erroneously sent failure-to-deposit (“FTD”) penalty notices to certain employers that reduced their employment tax deposits on Form 941 (Employer’s Quarterly Federal Tax Return) in anticipation of claiming sick and family leave credits under the Families First Coronavirus Response Act (“FFCRA”) or the employee retention credit (“ERC”) under the Coronavirus, Aid, Relief and Economic Securities (“CARES”) Act. Continue Reading

IRS Warns Employers to Choose Carefully When Selecting a Payroll Service Provider

On August 19, 2020, the IRS urged employers to exercise caution in selecting their payroll service providers (“PSPs”) following ongoing concerns that some disreputable PSPs may fail to deposit employment taxes, leaving businesses vulnerable to unpaid payroll taxes as well as penalties. Continue Reading

IRS Releases Additional FAQs on Deferral of Employment Tax Deposits Under Section 2302 of the CARES Act

On July 30, 2020, the IRS released guidance in the form of new frequently asked questions (“FAQs”)  addressing the deferral of the employer portion of Social Security taxes under section 2302 of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act.  These FAQs are broad in nature, providing guidance on various considerations relevant to section 2302 of the CARES Act, including application of these rules to first calendar quarter deposits, coordination with the next-day deposit rule, and considerations for employers that use third parties to report and deposit employment taxes with the Treasury.  Covington continues to review this guidance, and has summarized in this blog post some of the provisions we consider most relevant to employers.

When reviewing this latest guidance from the IRS, employers should be mindful that although they represent the current thinking of the IRS regarding section 2302, these FAQs are  non-binding; the IRS is under no obligation to comply with these FAQs and could therefore take a different approach at any time.  As we have noted previously, the IRS has changed course with respect to FAQs issued in connection with other provisions in the CARES Act, such as the employee retention credit. Continue Reading

Mnuchin Confirms Trump Payroll Tax Deferral is not Mandatory

Secretary Mnuchin acknowledged in an interview today that the employee Social Security tax deferral envisioned in President Trump’s Presidential Memorandum will not be mandatory.  The memorandum instructs the Treasury Department to issue guidance under Section 7508A permitting employers to suspend the withholding, depositing, and payment of the employee’s share of social security taxes (and the equivalent Tier 1 Railroad Retirement Tax Act taxes) for certain employees.  The suspension would apply to wages paid from September 1 through December 31, 2020.

As we reported in our earlier coverage of the August 8 memorandum, Section 7508A provides authority to the Secretary to disregard periods of up to one year in determining whether taxes were timely paid.  The statute does not, however, provide any mechanism to require taxpayers to delay the payment of taxes.  Accordingly, employers may choose to withhold and deposit the employee share of Social Security taxes without regard to the deferral.  Employers that elect to defer the withholding of the tax will remain liable under section 3102(b) for the payment of the employee’s share of Social Security taxes even if the employer does not withhold the tax and cannot later recoup the tax from the employee.  Indeed, if the employer ultimately pays the employee’s share of the taxes and does not recoup the amount from the employee, the payment would generally be an additional wage for which additional payroll taxes would be due.

President Trump has indicated that he intends for the employee’s share of Social Security taxes that may be deferred to be forgiven.  However, Sec. Mnuchin also confirmed in the interview that any forgiveness of the underlying tax liability will require Congressional action, a tenuous prospect given the fraught political environment in Washington.

Trump Executive Action to Defer Employee Share of Social Security Taxes Raises Significant Legal Questions for Employers

On Saturday, August 8, President Trump signed a Presidential Memorandum directing the Secretary of the Treasury to “use his authority pursuant to [Code section] 7508A to defer the withholding, deposit, and payment of the tax imposed by [Code section] 3101(a) . . . on wages . . . paid during the period of September 1, 2020, through December 31, 2020,” subject to certain conditions.  (The memo as originally posted on the White House website would have applied retroactively to wages paid August 1, 2020, but was subsequently updated.)  Two conditions are enumerated in the memorandum.  First, the deferral applies only with respect to any employee the amount of whose wages payable “during any bi-weekly pay period generally is less than $4,000, calculated on a pre-tax basis, or the equivalent amount with respect to other pay periods.”  Second, the amounts deferred shall be deferred without any penalties, interest, additional amount, or addition to the tax. Continue Reading

Senate Bill Would Ignore COVID-19 Assistance in Determining Worker Classification; Treat Certain Benefits as Qualified Disaster Relief Payments

Is an individual service provider an employee or an independent contractor?  As our employee benefits colleagues have noted previously in Covington’s Inside Compensation blog, the IRS test is complicated and just one of many for determining worker status under federal and state laws.  The American Workers, Families, and Employers Assistance Act (the “Bill”), one of a series of COVID-19 relief bills released by Senate Republicans, would address one aspect of worker classification during the COVID-19 pandemic.  Specifically, Section 214 of the Bill would provide that certain COVID-19 related benefits provided to an individual would not be taken into account in determining worker classification under the Code.  Section 214 further provides that such benefits (other than cash payments) would generally be considered qualified disaster relief payments under Code Section 139. Continue Reading

Senate Republican Proposal Includes Payroll Tax Credit to Defray Employer Expenses for COVID-19 Prevention

On July 27, Senate Republicans released a series of COVID-19 relief bills, including the “American Workers, Families, and Employers Assistance Act” (the “Bill”).  The Bill is a successor to several provisions in the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, passed in March of this year, which attempted to blunt the early effects of the COVID-19 pandemic.

Section 213 of the Bill would create a new “safe and healthy workplace tax credit,” which would provide a refundable payroll tax credit equal to 50% of an employer’s “qualified employee protection expenses,” such as COVID-19 tests, protective personal equipment, and cleaning supplies.  The new tax credit would also cover “qualified workplace reconfiguration expenses,” including workspace modifications to protect employees and customers from the spread of COVID-19, and “qualified workplace technology expenses,” including technologies designed to reduce contact between employees and customers that were acquired by the employer on or after March 13, 2020, and were not acquired pursuant to a plan in existence before that date.

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Senate Republican Proposal Would Enhance Employee Retention Credit

As we noted in an earlier post, on July 27, Senate Republicans introduced new legislation in response to the continued COVID-19 pandemic.  One of the introduced bills, titled the American Workers, Families, and Employers Assistance Act (the “Bill”), would enhance the existing employee retention credit. Continue Reading

Recapture of Excess COVID-19 Payroll Tax Credits Addressed in New Regs

On July 27, 2020, the IRS published Information Release 2020-169 announcing the issuance of new temporary and proposed regulations to implement procedures to assess, reconcile, and recapture any portion of the credits under the Families First Coronavirus Response Act (“FFCRA”) and the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) erroneously credited, paid, or refunded in excess of the actual amount allowed. Continue Reading

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