September 1, 2020
In response to failed stimulus talks on Capitol Hill in early August, President Trump issued a memorandum titled “Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster.” The memorandum defers employees’ 6.2% share of Social Security tax per paycheck on wages paid September 1 through December 31 of this year. The memorandum states the purpose of the deferral is to “put money directly in the pockets of American workers and generate additional incentives for work and employment, right when the money is needed most.” However, the memorandum has left employers with more questions than answers on how the deferral actually works. It is important to note the memorandum does not forgive the tax, but simply permits a temporary deferral, meaning, at least for now, the tax will eventually come due. President Trump has indicated that he hopes that if he is reelected, he will be able to get the deferred tax totally forgiven. Additionally, the memorandum directs the Secretary of Treasury to explore avenues to forgive the deferred taxes.
The payroll tax deferral is set to begin for wages paid September 1. It only applies to employees who make less than $4,000 on a bi-weekly basis (or, if a different payment schedule is used, it generally applies to employees making less than $104,000 per year). To implement this deferral, the memorandum directs the Treasury Department to issue guidance for employers. Nearly 3 weeks have passed since the memorandum was issued and we have not received any guidance. If guidance is not published by September 1, employers are faced with the choice to either continue withholding the tax from their employees as usual (even though some employees may be expecting bigger paychecks due to the order), or not withhold the tax from their employees’ paychecks. Although the latter seems to be the intent behind the memorandum, it puts employers and employees at risk of a big tax bill in 2021 since forgiveness could be contingent not only on the President’s reelection, but also the ability to get legislation for the forgiveness passed.
We are closely watching for developments on this issue. For now, employers should cautiously determine whether they should continue withholding their qualifying employees’ share of Social Security tax on wages paid on and after September 1. The prudent thing to do at this point appears to be to continue to withhold the tax until guidance has been released and employers can make a more informed decision.
If you have any questions on the payroll tax deferral, or any other Coronavirus tax updates, please contact any member of the McGrath North Tax & Estate Planning Group.
UPDATE: Since the publication of this Client Alert, the IRS and Treasury Department issued guidance relating to President Trump’s payroll tax deferral in Notice 2020-65 (the “Notice”).
The Notice does not explicitly state whether the withholding is optional or mandatory, but the nature of the Notice, along with Treasury Secretary Mnuchin’s public comments earlier in August that the deferral would be voluntary, indicates employers can choose whether they will continue withholding their employees’ share of Social Security taxes on wages paid on and after September 1 through the end of the year. If employers do choose to forgo withholding Social Security tax from their employees’ paychecks for the rest of the year, the employer will have from January 1 to April 30 of 2021 to ratably recoup the tax. In application, if the employer chooses to implement the deferral, the employee would not have any Social Security tax withheld from his or her paycheck for the remaining four months of 2020. However, the employee will have the amount that otherwise would have been withheld during those months absent this deferral withheld during the first four months of 2021, in addition to the standard 6.2%. This would result in doubled Social Security tax withholding for the employee per paycheck from January to April of 2021. Thus, employees would have larger paychecks now, but reduced paychecks in 2021 to account for the deferral.
It is not clear what happens if the employee leaves before the deferred taxes have been fully recouped from the employee in 2021. However, the Notice does allow the employer to stray from ratably recouping the withheld taxes if necessary. Based on that, employers may have the option to increase withholding on the departing employee’s final paycheck, however, more guidance is needed from the Treasury on this point.
If you have any questions about this alert, please contact the Tax members of our COVID-19 Response Team indentified below.
Contact information for the complete McGrath North’s COVID-19 Response Team can be found here.
For information regarding additional business-related concerns centered around COVID-19, please visit our COVID-19 Resource Guide here.