On Saturday, August 8, 2020, President Trump issued an executive memorandum for an employee payroll tax deferral that would allow Social Security tax withholdings and payments be postponed until 2021 to provide continued relief from the COVID-19 pandemic. While Treasury Secretary Steven Mnuchin stated participation would be optional, employers should be cautious if they elect to participate.
Key Provisions of the Payroll Tax Deferral Memorandum
While many details are still unknown, the key elements of this executive order include:
- Employers can opt in or out of participation.
- Only employees earning less than $104,000 annually ($2,000 weekly or $4,000 biweekly) are eligible to participate.
- Tax deferral only applies to the 6.2% Social Security tax on employees.
- The time frame for deferring taxes is September 1, 2020 through December 31, 2020.
- Barring further orders or legislation, tax payments are merely delayed, not forgiven.
Per the Treasury’s Notice 2020-65 of preliminary guidance issued on August 28, employers must pay all deferred taxes during the first four months of 2021. “Otherwise, interest, penalties, and additions to tax will begin to accrue on May 1, 2021 with respect to unpaid deferred taxes.” (Source: NAPEO)
Why Employers are Wary to Participate with Offering an Employee Payroll Tax Deferral
With minimal guidance issued to date, and an effective date of September 1, 2020, there are many questions that have yet to be answered, including:
- Is the deferral factored back into an employee’s income, come 2021? If so, how does that impact tax withholdings and benefits?
- What are the reporting requirements for employers?
- How should employers allow employees to opt in or out of deferring taxes?
- Can employers join after September 1 and refund taxes already withheld?
- If an employee quits prior to fully collecting deferred taxes, can the employer recoup deferred withholdings from their final paycheck?
- Would employee wages be able to go below minimum wage to recoup deferred withholdings?
- If deferred withholdings aren’t recouped, will the employer be held liable for deferred tax payments for an employee who no longer works for them?
In addition to these concerns, most payroll systems need months to make adjustments for stopping and starting tax withholdings and payments. The National Payroll Reporting Consortium issued a statement on August 20, 2020 addressing concerns of insufficient time to implement tax deferrals. “Applying a different tax rate for part of the year, beginning in the middle of a quarter, and applying such a change to some employers but not others, and to some employees but not others, is quite complex.”
Bottom line: under a simple deferral, employees are left with a large tax bill later rather than a tax holiday. And employers? They’re left with an administrative nightmare and perhaps the bill for unpaid deferral payments.
While the payroll tax deferral isn't a great benefit for employees, it's worse for employers. Because of this, many business organizations signed a coalition letter stating their intent to not participate.