U.S. Treasury Department and
IRS Released Guidance on President Trump’s Payroll Tax Deferral
On August 8, 2020, President Trump issued an executive order to defer the withholding, deposit, and payment of the employee’s share of social security tax (6.2%) from wages paid September 1, 2020, through December 31, 2020. While the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) previously deferred the employer’s portion of social security tax, the Presidential Memorandum relates to only the employee’s portion of social security tax. This deferral is not mandatory.
This deferral only applies to those employees whose gross earnings are less than $4,000 during any bi-weekly pay cycle or the equivalent amount with respect to other pay cycles. The determination of applicable wages is made on a pay period-by-pay period basis. The relief of social security tax applies to those wages paid to the employee for that pay period, regardless of the amount of wages or compensation paid to the employee for other pay periods.
The employer is responsible for withholding and depositing the taxes that were deferred from wages September 1, 2020, through December 31, 2020, beginning on January 1, 2021, and ending on April 30, 2021, without interest and penalty. For any unpaid portion of these taxes, interest and penalty will start accruing May 1, 2021.
The guidance makes the employer responsible for the payment of the deferred taxes but does state that the employer can make arrangements to collect the applicable taxes from the employee if they are to leave employment before the tax is repaid or does not make enough to pay the additional tax liability.
It is up in the air if Congress will vote to have these deferred taxes forgiven. That makes the decision not to defer harder for the employer/employee. If they do not defer and the tax is later forgiven, those employees will lose out on social security tax free money. However, if it is not forgiven and they defer the taxes, then the employee has the financial burden of paying it all back by doubling their taxes early in 2021, and the employer has the financial burden of trying to collect the tax from employees who leave their employment. There are still too many uncertainties to make a clear decision on whether to defer or not!
It is not clear if this will affect self-employed individuals. It is also unclear if the employee can choose to opt out of the deferral or if the employer can require an employee to sign a promissory note for the deferred tax amount.
Since this is to go in effect today, let’s hope more guidance comes soon.