Deferral of Payroll Taxes – New Executive Order

On August 8, 2020 President Trump signed four Executive Orders (EO) designed to provide additional relief to those impacted by the COVID-19 pandemic. The orders addressed enhanced unemployment payments, student loan relief, moratoriums on evictions, and a deferral of payroll taxes; it is the last order that I will be addressing in this post.

Payroll taxes, commonly referred to as employment taxes, are assessed on all employee wages and are comprised of 6.2% Social Security tax and 1.45% Medicare tax, paid by both the employer and employee. These taxes apply to most employees and are in addition to the state and federal income tax withholding.

The EO for deferral of payroll taxes applies only to the employee’s share of the 6.2% Social Security tax for wages paid for the period beginning September 1, 2020 through December 31, 2020. The employer will not incur any penalty, interest, or addition to tax for not withholding, depositing, or making payment of these taxes for the deferral period. The deferral does not include the employee’s portion of Medicare tax.

The deferral only applies to employees making pre-tax income of less than around $104,000/year. This translates to additional take home pay for eligible employees of up to a maximum of approximately $2,100 over the deferral period.

Important Point – this is currently a deferral of the taxes that would normally be collected from the wages paid during this four-month period. This means, baring any adjustments in the future, these funds will have to be paid back by the employee at a later date. In essence, it is a short-term interest free loan.

Although the deferral is scheduled to begin in just a few short weeks, unfortunately at this time, there remains several very important questions that have yet to be answered. Treasury is expected to release guidance on how to implement the deferral and will hopefully address, among other things, the following:

  • How the employee will pay back the amounts deferred,
  • How long the employee will have to repay the amounts deferred,
  • How to handle deferred taxes when employees change jobs,
  • If the deferral is optional or required for employers,
  • If employees can opt to continue having the taxes withheld, and,
  • If the deferred taxes will be forgiven.

This deferral is in addition to the deferral available for employer’s share of Social Security taxes under the CARES Act from March 27, 2020 to defer the employer portion of Social Security taxes over two years.

We will provide additional information as it becomes available and, once the Treasury provides the expected guidance, pass this information on to you.