On August 8, President Trump issued a memorandum to the Secretary of Treasury entitled “Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster.”
The payroll tax deferral in this executive order does not apply until Sept. 1. Also, it only applies to employees who make less than $4,000 (before taxes) on a bi-weekly (or similar) basis (so it appears that the deferral does not apply to employees making $104,000 or more per year).
The executive order only delays (does not forgive) the employee’s share of Social Security tax (i.e., 6.2% of pay up to the annual limit of $137,700) on wages paid on Sept. 1 through Dec. 31 (about 18 weeks). It does not apply to income tax withholding or to the employer’s share of FICA (employer Social Security tax deferral is already available under the Coronavirus Aid, Relief, and Economic Security Act (CARES), which allows employers to repay half of the deferred amount by Dec. 31, 2021 and half by Dec. 31, 2022). Interest and penalties will not accrue during the deferral period for the employee’s share of Social Security tax which is not yet defined.
The order instructs the Treasury Department to issue guidance explaining how this payroll tax deferral will work. If guidance is not published by Sept. 1, employers will face a dilemma: either (1) continue withholding the money from employees (who may be expecting bigger paychecks due to the President’s order) or (2) pass the deferral on to employees (which seems to be what the order intended) which could put employers or employees at risk of a big tax bill at the end of the deferral period.
Many things are unclear, including whether the payroll tax deferral is optional or mandatory: if optional, does the employee or employer exercise that option, must the employer collect and remit the repayments or will that be done on individual Form 1040, how will former employees be treated, etc. Since reprogramming payroll systems is often expensive, waiting for clarifying guidance before making any changes seems prudent.
Normally, employers withhold and promptly pay the employee’s share of FICA to the federal government. But keep in mind that from March 27 to Dec 31, employers who are eligible for the CARES employee retention credit (ERC) are allowed to retain the employee’s share of FICA as an advance ERC tax credit. Similarly, employers who are eligible for the Families First Coronavirus Response Act (FFCRA) mandatory federal paid sick and child care leave may also retain the employee’s share of FICA as an advance FFCRA tax credit.
If you have any questions, please contact the Crosslin tax team at 615-320-5500. We are here to help!