Presidential Order on Payroll Tax Deferral
On August 8, 2020, President Trump issued an executive order which directed the Department of the Treasury to enact a payroll tax deferral for some employees. This applied to payroll taxes on wages from September 1 through December 31, 2020. We are now left picking up the pieces of determining as an employer, what does this mean to you? Unfortunately the list is longer of what we don’t know about this than what we do know about it.
The general premise of this part of the memorandum was a deferral of the social security tax for employees making generally $4,000 or less per bi-weekly payroll (or a total of $104,000 annually on any different payroll cycle) for the qualifying wages paid from September 1 until December 31, 2020. IRS Notice 2020-65 does clarify that the qualifying wages should be looked at on a payroll by payroll basis, and not in total. So that means, you may have an employee who qualifies on one pay period, but not another as well.
Some key takeaways that we know or understand as of August 31, 2020 are:
- This is only a deferral of the social security tax for the employees, not forgiveness at this point.
- We don’t know how or who will be responsible for paying this back in after January 1, 2021 if Congress doesn’t take action to make this forgiven rather than deferred.
- Late on August 28, 2020, the IRS issued Notice 2020-65 which stated that the employer should withhold and pay in the total applicable taxes that the affected taxpayer deferred ratably from wages and compensation paid between January 1, 2021 and April 30, 2021. Interest, penalties and additions to tax will begin to accrue on May 1, 2021 with respect to any unpaid applicable taxes.
- As this is currently only a deferral, the payroll taxes will still be owed. There is much concern over the hardship this could cause employees next year when this is due to be paid in at that time.
- It appears, although isn’t clear, that the employee should request this to the employer. The AICPA has sent a letter to Treasury asking for guidance on this piece along with several other items related to this.
- On August 12th, Treasury Secretary, Steven Mnuchin, informally remarked that employers would not be required to implement this and could continue to withhold and remit the payroll taxes as usual.
- We have no idea how long it may take payroll software’s to implement this reduction in withholding on employees paychecks when and if we do get guidance from the Department of the Treasury.
- This has the potential to cause some great difficulties to employers if they end up being required to somehow pay this back in later and employees are no longer with that Company, or if the Company is not able to withhold enough due to Department of Labor laws to recover these amounts back in full.
- See updated bullet point 1 about the IRS Notice 2020-65. This makes it appear to be the employer’s responsibility to deal with this. The IRS went so far as to say the employer can, if necessary, “….make arrangements to otherwise collect the total Applicable Taxes from the employee.” This seems to be an overall terrible plan for many employers who could get stuck with this ‘tax bill’ or stuck trying to collect it from possibly prior employees.
As of now, we are a mere day away from the “start” of this deferral on September 1, and we still don’t have any clear guidance from the Department of the Treasury on this. Currently, our recommendation until we have better and more clear guidance would be that as an employer, you continue to withhold and remit all traditionally required payroll taxes for your employees. Our goal is to keep you in compliance and out of any penalty situations. Contact your KT representative if you have further questions or discussions around this.