President Trump has signed an executive order titled “Memorandum on Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster” directing the Treasury Department to issue guidance under Sec. 7508A to defer the withholding deposit and payment of the employee’s portion of the Social Security Tax (i.e. 6.2% up to the annual limit of $137,700). The deferral will apply to the period from September 1, 2020 through December 31, 2020.
- Keep in mind that under the CARES Act all employers can defer payment of the employer portion of these taxes at this time.
The relief is available to any employee whose gross wages or compensation is less than the equivalent of $4,000 for a bi-weekly pay period. The $4,000 bi-weekly payroll would work out to an annual payroll of $104,000. It would appear that the maximum gross payrolls to qualify for the relief would be the following for the various pay periods:
- $2,000 = weekly
- $4,333.33 = semi-monthly
- $8,666.67 = monthly
If the employee’s pay goes over the limit at all, the entire amount of the employee’s Social Security tax must be withheld and paid by the employer.
No penalties, interest, or additions to tax would apply to these deferred payments.
The executive order defers the tax in question. This is because Sec. 7508A only allows the Treasury Department to defer the payment of taxes without penalty or interest for up to a year during a covered disaster. The President is asking the Treasury Department to look into whether those payroll taxes can be forgiven. Clearly there will be significant issues that arise if this results in only a deferral of the taxes the employee owes since at some point the employees would need to pay these taxes and employers would need to deposit them.
More Guidance Needed by September 1
As stated above, the executive order instructs the Treasury Department to issue guidance explaining how this payroll tax deferral will work. If guidance is not issued by September 1, employers will be faced with a dilemma to either:
- Continue withholding the money from employees (the employees may be expecting to receive bigger paychecks) or
- Follow through with the executive order and defer the employees Social Security tax (employers or employees could be at risk for a big tax bill at the end of the deferral period).
One of the many things that are currently unclear is whether the payroll tax deferral is optional or mandatory. If it is optional, who exercises the option, the employer or the employee? Does the employer have to collect and remit the repayments, or will that be done on the employee’s individual income tax return? How will former employees be treated?
Due to the fact that reprogramming payroll systems is often expensive and time consuming, waiting for clarifying guidance before making any changes seems advisable.
When that guidance does come out, we will provide an update. In the meantime, if you need assistance, reach out to your trusted advisor at BerganKDV or start here.