President Trump signed four COVID-19 related executive orders on August 8, 2020 after Congress failed to pass economic relief legislation. Included in the executive orders was a payroll tax deferral for American workers earning, generally, less than $100,000 on an annualized basis. The order did not include details on implementation, repayment terms of the deferral, or other critical pieces of information needed to determine if businesses would participate. On August 28th, the Treasury Department and IRS issued further official guidance on the payroll tax deferral.
According to IRS Notice 2020-65, employers can defer the withholding, deposit, and payment of certain payroll taxes on wages paid from Sept. 1 through Dec. 31, 2020. The deferral applies to the employee portion of employee’s 6.2% share of the Social Security tax and Railroad Retirement Act Tier 1 tax.
The employee Social Security tax deferral may apply to payments of taxable wages to an employee that are less than $4,000 during a bi-weekly pay period, with each pay period considered separately. No deferral is available for any payment to an employee of taxable wages of $4,000 or above for a bi-weekly pay period. The eligible period includes wages paid from September 1, 2020 through December 31, 2020.
This is a deferral and not an exemption from or reduction of payroll tax liability. The due date for deferred employee Social Security taxes is postponed until the tax period beginning on January 1, 2021, and ending on April 30, 2021. Deferred payroll taxes not paid during this period will be subject to interest and penalties
The new guidance from the IRS makes clear that the payroll tax is a deferral and not a reduction in the actual tax employees are required to pay. The executive order includes language that indicates the Treasury of Secretary should, “explore avenues, including legislation, to eliminate the obligation to pay the taxes deferred pursuant to the implementation of this memorandum.”
President Trump has also publicly indicated he would make efforts to work with Congress to forgive the deferred taxes. However, Democrats in the House and the Senate have publicly demanded President Trump reverse the action. The Wall Street Journal reported that Senate Democrats are seeking to have the order overturned through the Congressional Review Act.
The executive order and the subsequent guidance from Treasury do seem to make clear that participation in the deferral is voluntary. Due to the uncertainty surrounding the order and complexity to implement and potentially repay, it is likely to see low participation from the private sector. The federal government, has decided to stop withholding the tax from the paychecks of hundreds of thousands of federal workers despite the uncertainty regarding whether or not the employees will need to repay the deferred taxes.
There are still major areas of ambiguity employers should be concerned with including:
- Treasury confirmation that the obligation to repay is the employee’s (including if the employee separates from the employer prior to the end of the repayment period)
- Explicit guidance on how employees should repay the deferred amounts – especially in situations where the employee is no longer employed by the employer who paid the applicable wages and deferred the tax on their behalf
- If the employee is not able to repay the deferred tax, would the employer be responsible and / or would penalties apply
- If forgiven, guidance on whether the forgiven taxes would be treated as taxable income to the employee. If later paid by the employer for any reason, if those amounts would be deductible
- If the repayment period requires periodic payments or if a lump sum payment at the end of the period would be sufficient to avoid penalties and interest
We would advise employers to take several steps if (preferably before) a decision is made to participate in the payroll tax deferral. Please reach out to us to discuss if you have questions and are considering participating. We can walk through suggestions and considerations based on your unique set of circumstances.
We are in this together,
Brinker Simpson & Company, LLC
Disclaimer: This alert is for informational purposes only and does not constitute professional advice. Information contained in this communication is not intended or written to be used as tax advice & cannot be used by the recipient to avoid penalties that may be imposed under the Internal Revenue Code. We strongly advise you to seek professional assistance with respect to your specific issue(s).