What You Need to Know About the Deferral of Payroll Tax Obligations

August 14, 2020 | Article

How the Executive Order to Defer Withholding of Employee Payroll Taxes Will Impact Your Organization

The recent executive order from President Trump to defer certain payroll tax obligations was part of four executive orders designed to provide additional relief due to COVID-19. Specifically, the guidance relates to the withholding, deposit and payment of the tax imposed for Social Security type taxes.

The period of the payroll tax deferral starts on September 1, 2020, and runs through December 31, 2020, but is subject to defined conditional limits. Because the relief is on the employee side, if the deferral provision is implemented, those employees affected should see larger paychecks in September.

Make sense of the payroll tax deferral’s impact on your organization.

How the Payroll Tax Deferral Works
There are multiple conditions when it comes to the executive order for payroll tax deferral.

  1. Deferrals are available for any employee whose wages or compensation, payable during any bi-weekly period is less than $4,000. This is calculated on a pre-tax basis, or the equivalent amount with respect to other pay periods.

    Using the $4,000 amount, that would make the deferral available to an employee having an annual salary of $104,000. And, it is important to note that if the employee’s compensation is over that amount, they do not qualify for the deferral.

  2. The second condition is not really a condition, but more of a benefit statement. Amounts that were deferred pursuant to the implementation of the executive order will be deferred without any penalties, interest, additional amount, or addition to the tax.

Common Questions Surrounding the Payroll Tax Deferral Obligation
The executive order also notes further guidance still needs to be issued to implement the payroll tax deferral. Since the potential for deferral starts on September 1, 2020, that timeline doesn’t leave the secretary of the treasury much time to issue the guidance necessary to implement the rules to be used.

Here are some of the common questions we’re receiving:

Will the Payroll Tax Deferral Need to be Repaid?
The requirement to have the deferred payments repaid is addressed in the executive order, albeit vaguely: “The Secretary of the Treasury shall explore avenues, including legislation, to eliminate the obligation to pay the taxes deferred pursuant to the implementation of this memorandum.”

Because the memorandum does not provide a clear path of forgiveness, it sets up several questions related to the obligation to repay the payroll tax deferral.

Does the Executive Order Defer Social Security, Medicare, FI and State Taxes?
The memorandum defers only Social Security type taxes usually paid by the employee.

How is this Different than Previous Provisions of the CARES Act?
The CARES Act allowed employers to defer paying their portion of Social Security through the end of 2020. This new executive order impacts the employee portion of Social Security type taxes, leading to a potential increase in the amount in an employee’s paycheck.

If the Employer’s Tax Portion is also Deferred, Will They Need to be Paid at a Later Date?
Currently companies can still defer the employer portion of payroll taxes. If you have chosen to do so, you still need to pay it back. The employer tax is due back 50% on December 31, 2021, and the remainder on December 31, 2022.

Is the Deferral Only for Employees Grossing $4,000 or Less During a Bi-Weekly Period?
Yes, only those who gross $4,000 or less will qualify for the payroll tax deferral. The payroll tax deferral order doesn’t apply to compensation paid before September 1.

Can an Employee Opt Out if They Wish?
There is currently no guidance on the ability for an employee to opt in or out of the payroll tax deferral option.

Much Guidance is Still to Come in Terms of the Payroll Tax Deferral
Unfortunately, without the implementation guidance from the treasury secretary, we are left with the ability to raise good questions, but can only speculate on the answers, which is not what should be done in this case.

We will need the guidance to respond to important issues and questions, such as:

  • Can the potential election in or out be made by an employee?
  • Does the deferral apply to self-employed taxpayers?
  • How is the employer protected from having to pay the tax in the future when the employee no longer works for them?
  • How would the deferral relate to the COVID-19 legislation already in place?

We will continue to monitor the situation and hopefully rejoice in the delivery of guidance from the treasury secretary to allow more questions to be answered and implementation procedures to begin.

Understand how various relief provisions are affecting your payroll and withholding requirements.


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