Payroll Tax Deferrals: What You Need to Know

On August 8, 2020, President Trump issued an executive order under the CARES Act for Payroll Tax Deferrals, directing the Secretary of the Treasury to allow the deferral of withholding and deposit of certain payroll taxes, from September 1, 2020 to December 31, 2020. Recognizing that employers have since struggled to understand how to implement said deferrals, the Department of Treasury issued Notice 2020-65 to provide some guidance on the issue. Despite the guidance, many open questions remain about how the government will implement these executive orders and what this means for businesses and individuals. Some of this ambiguity won’t be resolved anytime soon, but here’s what we know.

How are payroll taxes effected?

Payroll taxes refer to the taxes paid to the IRS by both by both employees and employers for national Social Security and Medicare funds. The executive memo signed by Trump relates only to payroll taxes refers only to employee Social Security taxes, which represent 6.2% of an employee’s paycheck. The maximum amount an employee can defer between the first of September through the remainder of the year is $2232.

Does this apply to employer or employee payroll taxes?

This only applies to employee payroll taxes. Employer payroll taxes were already instituted in the CARES Act.

What actions must employers or employees take?

The way that the order is written, it seems that employees would opt-in for this tax deferral, and employers must honor their opt-in requests. While the Notice provides for a postponement of the payroll taxes described above, it notes that such amounts must ultimately be paid between January 1 and April 30, 2021, or an employer could be subject to interest, penalties, and other amounts for such unpaid taxes. In other words, the Notice authorizes a temporary deferral of such taxes, but those taxes must eventually be paid in early 2021 (unless there is future legislation from Congress).

Employers may find that they cannot recover such amounts from employees who terminate employment prior to 2021. For employees who remain employed into 2021, the double withholding of employee-share Social Security tax until the 2020 deferral is repaid may create a financial hardship. Such practical difficulties may pose substantial hurdles for employers that seek to provide this temporary relief to their employees

What payments are eligible for deferral?

This deferral applies to wages or compensation paid between September 1, 2020 and December 31, 2020, but only applies to compensation that is less than $4,000 (determined on a bi-weekly basis).

Will employees have to pay the deferred payroll taxes eventually?

As covered above, the answer is currently: yes. While there have been some political discussions of making these cuts permanent, those are merely hypothetical discussions at this point. Without Congressional action, it is likely that the employee’s deferred payroll taxes will need to be repaid. Although paychecks will be bigger in the meantime, eventually these deferred taxes will be paid by employees in 2021. Once the deferment period ends, it is ultimately the employer who will be responsible for paying the deferred amounts back to the government, even if they haven’t collected the taxes from their employees.

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