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Executive Order Defers Payroll Taxes but Questions Remain

payroll tax deferral

On August 8, 2020, just as crucial unemployment benefits written into the CARES Act expired, President Trump signed four executive orders aimed at providing economic relief to American taxpayers affected by the coronavirus. Of the four orders issued, workers and their employers are paying close attention to the directive that defers payroll taxes through the end of the year.

The Particulars

The executive order allows employers to defer payment of the employee’s portion of payroll taxes from September 1, 2020 until December 31, 2020.

[The employer’s portion is not eligible for deferral under this executive action, although employers may be able to defer their portion of payroll taxes under the CARES Act.]

The deferral only applies to employees’ Social Security taxes, which are 6.2% of their salary up to the Social Security wage cap of $137,700 (in 2020). In addition, the deferral is only available to employees who make less than $4,000 in a bi-weekly period – approximately $104,000 annually. In theory, workers can retain these taxes and use those funds to help them navigate coronavirus-related financial setbacks.

The Questions

Because the order is for a deferral of payroll taxes and not a waiver, the taxes will likely come due eventually. However, President Trump has asked the Treasury to look into methods to waive the payroll tax deferral.

Employers have raised several other questions about the tax deferral plan, including:

  • What would happen if the business closed before the tax repayment deadline
  • What types of compensation (bonuses, tips, commissions, fringe benefits, etc.) count toward the $4,000 bi-weekly wage ceiling
  • When the taxes will be due and what the repayment schedule will look like
  • How they should collect tax repayment from employees
  • How they can reclaim deferred taxes from terminated or furloughed employees
  • Is this executive order even legal

The Department of the Treasury will eventually release guidance on how the tax deferral program should be administered, but the affected period is fast approaching. Employers may not be given adequate lead time to implement the changes to their payroll processes if they wait for the guidance to be released.

Fortunately, our Accounting Services and Tax Departments are proactively following this issue and can help you come up with a plan of attack. Our teams have experience with assisting clients in rolling out new payroll tax procedures and can help your business during this time of uncertainty. If you have any questions about this executive order, please reach out to us.