Employee Payroll Tax Deferral Guidance
On August 8, 2020, President Trump signed an executive order allowing employers to defer the withholding and payment of the employee share of Social Security taxes from September 1 through December 31, 2020. As the executive order left many unanswered questions, the IRS later released a notice on August 28, 2020 to answer some of the many questions that remain.
What We Know
- We believe employers have a choice to apply these provisions or “opt out”. Treasury Secretary Mnuchin has previously indicated to the press that employers would not be required to offer the deferral.
- The payroll tax deferral applies to pay dates between September 1, 2020 and December 31, 2020.
- The payroll tax deferral does not apply to all employees; rather, only those employees earning less than $4,000 for a bi-weekly payroll period. Eligibility is determined on a pay period-by-period basis.
- Employers who adopt the deferral provision would later need to “double up” on withholding the employee’s share of Social Security (i.e., withhold 12.4% from January 1 to April 30, 2021 instead of the normal 6.2% of wages up to the OASDI annual wage base) Employers will need to inform employees of their responsibility to withhold “double tax” in 2021!
- Neither the executive order, nor the IRS Notice eliminates or forgives the tax liability. The executive order simply indicates the “Secretary of the Treasury shall explore avenues, including legislation, to eliminate the obligation to pay the taxes deferred pursuant to the implementation of this memorandum.”
Open Issues and Unanswered Questions
- Administratively, it will be a challenge to adapt payroll systems to handle these changes in such a short amount of time.
- Can an employer allow specific employees to “opt in” or “opt out”?
- What recourse do employers have if the employees would leave or be terminated before all payroll taxes have been withheld? Presumably, employers would be responsible for paying the balance due.
- What if an employer elects to not defer payroll taxes, but such taxes are later forgiven through an act of Congress?
Let Us Help
Our professionals remain up-to-date with these frequently changing government incentives and aid programs. If you are uncertain about or need further guidance, please call our office.
- August 8, 2020 Presidential memorandum
- August 28, 2020 IRS Notice 2020-65
- Tax Alert from BDO USA regarding the deferral of the employee’s share of Social Security for those employers who wish to apply the deferral provisions.