New Guidance Issued on President Trump’s Payroll Deferral Executive Order
On August 8, 2020, President Donald J. Trump signed an executive memorandum directing the U.S. Department of the Treasury (Treasury) to defer certain payroll tax obligations amid the ongoing COVID-19 pandemic. For further background on this payroll deferral executive order, see our previous BKD Thoughtware® coverage.
On August 28, the Treasury and IRS issued Notice 2020-65 with further guidance to employers on how to implement this payroll tax deferral. Any employer required to withhold and pay the employee share of Social Security tax (or railroad retirement tax equivalent) is deemed to be affected by the COVID-19 pandemic and may take advantage of this payroll tax deferral executive order. While it doesn’t specifically state the deferral is optional, the notice’s wording that the due date for withholding and payment of tax is postponed indicates employers have flexibility. This also is consistent with comments made by Treasury Secretary Steven Mnuchin shortly after the executive memorandum was released, in which he stated the payroll tax deferral is voluntary. Therefore, it appears employers have discretion (even on an employee-by-employee basis) on whether to stop withholding starting September 1, 2020.
The applicable wages are taxable wages to an employee that are less than $4,000 during a biweekly pay period, with each pay period considered separately. No deferral is available to an employee with taxable wages of $4,000 or more for a biweekly pay period. Note: this means it’s possible employees could be above the $4,000 threshold for one pay period and, therefore, not eligible for this payroll tax deferral while remaining eligible in other pay periods when their taxable wages are less than $4,000. Employers will need to carefully monitor the applicable wages each pay period for participating employees.
As payroll tax withholding and depositing is the employer’s duty on behalf of the employee, it will be up to employers to manage the administrative responsibility of implementing this executive order if they choose to do so. If an employer postpones withholding and payment of Social Security tax on applicable wages, the employer should withhold and pay the employee’s deferred Social Security tax ratably from wages and compensation paid to the employee between January 1, 2021, and April 30, 2021, or interest and penalties will begin to accrue on May 1, 2021. In other words, the withholding and payment of the employee portion of Social Security tax is deferred until the first quarter of 2021. The employer’s deposit obligation also is postponed, but only for the employee’s portion of Social Security tax paid on the applicable wages.
Example: Bob is an employee of XYZ, Inc. and has an annual wage of $50,000, which is paid on the 15th and last day of each month, i.e., $2,083 per pay period. Since Bob’s biweekly pay is less than $4,000, he is eligible for the Social Security tax deferral. Assuming XYZ, Inc. chooses to implement the deferral, Bob’s net paycheck would increase by approximately $129 for each pay period during the September 1, 2020, through December 31, 2020, deferral period (6.2 percent of $2,083). Bob’s total Social Security tax deferred would be approximately $1,032, which XYZ, Inc. would recover via additional Social Security tax withholding from Bob’s paychecks during the period January 1, 2021, through April 30, 2021. In other words, assuming Bob’s annual wage in 2021 is still $50,000, he would have $258 of Social Security tax withheld during the January 1, 2021, through April 30, 2021, pay periods ($129 of normal Social Security tax withholding plus ratable portion of the $1,032 in deferred Social Security tax withholdings from 2020).
The IRS has released an updated Form 941 in draft form, with the addition of line 24 to report the deferred amount of the employee share of Social Security tax. However, additional form instructions on this issue haven’t yet been published.
A common question that many employers are asking is how to handle situations where an employee leaves employment prior to the end of the payroll tax deferral period or prior to the end of the repayment period in 2021. The notice doesn’t specifically address this question but does include a statement that, if necessary, employers may make arrangements to otherwise collect the total deferred taxes from the employee.
Based on this language, it appears an employer may have the ability to recover the total deferred amount from the former employee, such as by increasing withholding on the employee’s final paycheck. However, the IRS will likely need to issue additional guidance to provide more clarity on this question.
President Trump intends to ask Congress to forgive the deferred amount or, if he wins re-election in November, to implement permanent payroll tax cuts. However, as of now, employees deferring their payroll tax obligations under this executive order from September 1, 2020, to December 31, 2020, will be expected to pay the deferred amount out of their paychecks in the first quarter of 2021.
Prior to stopping withholding, employers should consult with their payroll provider and their tax advisor regarding the implementation of this executive order. Employers also should consider their messaging to employees on the employer’s decision of whether to participate in the deferral; many employees may not fully understand this is only a short-term deferral, and any increase they see in their paychecks now would be offset by a similar decrease during the first four months of 2021.
BKD will continue to monitor this situation and share further information as additional guidance is released. For questions, reach out to your BKD Trusted Advisor™ or use the Contact Us form below.