Crucial Payroll Tax Deferral Guidance
Last Friday evening, the Internal Revenue Service released a three-page guidance document to implement President Trump’s Executive Action to defer employees’ payment of payroll taxes in an effort to increase take-home pay. This payroll tax deferral affects an employee’s 6.2% portion of payroll taxes, which helps fund Social Security. The deferral is also limited to employees making less than $4,000 on a bi-weekly basis, or $104,000 per year. The guidance has been highly anticipated by small business since the announcement on August 8, 2020. President Trump has said that if he gets re-elected he will ensure forgiveness of the deferred taxes. His re-election campaign also promises to cut payroll taxes permanently in the future.
For businesses that choose to participate in the payroll tax deferral, the deferral begins on September 1 and runs through the end of 2020. The IRS has chosen to implement this deferral by delaying the deadline for withholding the employee portion of payroll taxes until the first four months of 2021. This means that if a company chooses not to participate in the program they simply can continue to withhold and remit to the IRS the employee share of payroll taxes. There was no guidance released as to whether companies are allowed to participate on an employee-by-employee basis in the event some employees choose not to participate. However, the basis of the guidance is that the deadline for withholding is delayed, but no requirement that no withholding take place was included.
Only employees making less than $4,000 in gross wages or compensation on a pay-period by pay-period basis can receive this deferral, meaning that an employee’s share of payroll taxes are deferred only if their gross wages does not exceed $4,000 for that pay-period (or equivalent threshold based on other pay-periods), this is not based on the annual salary exceeding $104,000. This may cause difficulty for employees paid on commission that may have large commissions paid during one pay-period over the $4,000 threshold, but under for another pay period.
Unless Congress forgives the deferred payroll taxes, the IRS expects employers to collect and remit the payment of these payroll taxes by withholding a double share of employee payroll taxes from January 1 to April 30, 2021. If the deferred amount is not paid by April 30, interest and penalties begin on May 1, 2021. This means the employee share of payroll taxes paid in the first four months of 2021 will be 12.4%.
The guidance does allow for business owners to make arrangements for employees to pay deferred taxes in a different arrangement; however, this is likely reserved for employees that change jobs between September 1, 2020 and April 30, 2021. Initial public statements by Trump Administration officials made it sound like the employee would be responsible for repaying the deferred taxes over period of years. A public disagreement between the White House and the Treasury Department over who would be responsible for paying back the owed taxes has ensued. This guidance makes it clear the employer is responsible for withholding the owed taxes in early 2021, while the economy may still be in recovery. The timing is likely a political decision to push Congress to forgive the owed taxes.
So far, Congress has not made any indications that it plans to forgive the deferred payroll taxes, although failure to forgive would be an unpopular move, as it would require employees to pay double payroll taxes for the first four months of 2021. In an election year, Democrats will be unwilling to give President Trump a political win this close to the election, and possibly try to hang the albatross of increased payments around his neck if Trump is reelected. No guidance has been released on withholdings paid for the rest of the year if Congress does forgive the deferral, further complicating any decisions made by business owners about whether or not to use the deferral.