On August 8, President Trump signed a number of executive orders after Congress was unable to reach an agreement on the next round of pandemic assistance legislation. One of these orders was a memorandum to the Secretary of the Treasury entitled “Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster.”
In short, the order would allow employers to defer withholding the employee portion of the Social Security tax (i.e., 6.2% of pay up to the annual limit of $137,700), from September 1, 2020 through December 31, 2020. The deferral would only apply to employees making less than $4,000 before taxes on a bi-weekly or similar basis; i.e., those making less than $104,000 per year. The order does not apply to income tax withholding or to the employer’s share of FICA (note that employer payroll tax deferral was a component of the CARES Act).
The order instructed the Treasury to issue more detailed guidance on how the payroll tax deferral will work, so much is still unclear – including whether the deferral will be optional or mandatory. However, it is important to point out that this order only delays – it does not forgive – the employee’s share of Social Security tax. As it currently stands, employees will still be responsible for payment of the tax. So while employees may see more money in their paychecks for the final four months of the year, they may be at risk of a large and unexpected tax bill in 2021.
For this reason, a group of business leaders signed a letter to the White House and Congressional leaders on August 17, calling the order “unfair to employees” and possibly “unworkable” for employers. The letter noted that implementing the order would be “less challenging” if employees were not required to pay back the deferred taxes. However, by merely deferring taxes, “employees would be stuck with a large tax bill in 2021.”
The letter included estimates for the potential tax bill that would be due in 2021 for a range of salary levels, from $751.15 for an employee making $35,000 per year to $2232.00 for an employee making $104,000 per year.
Even though many of the details regarding the implementation of this order are as yet unavailable, it has received a great deal of press. Your employees may be wondering whether they will see an increase in their paychecks starting in September, perhaps without understanding that the “extra” money will need to be repaid next year. For these reasons, you may want to consider proactively communicating the situation to your employees, including what we know so far and the potential future tax consequences. After such a challenging 2020, the last thing anyone wants in 2021 is a surprise tax bill.
As always, we are here to help and are happy to assist you with sorting through these ever-changing tax scenarios. If you have any questions about these or any other matters, please contact your Kreischer Miller relationship professional or any member of our team. We also continue to update our COVID-19 Resource Center, which you can access here.
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