On August 8, 2020, President Trump issued a memorandum requesting Treasury Secretary Steve Mnuchin exercise his authority to defer withholding and remittance of certain payroll taxes. The goal of the President’s memorandum is to put some additional cash in the pockets of working Americans that may be struggling with the economic uncertainties caused by the COVID-19 pandemic.
While President Trump’s memorandum provided a broad outline of his vision, it will be up to the Treasury to provide guidance on the specific details of the plan. Several organizations, including the American Institute of CPAs, have reached out to the Treasury Secretary requesting this guidance as there are a number of questions about how this provision will be enacted and implemented.
Here’s what we know so far:
You won’t see any changes in paychecks just yet. The payroll tax deferral applies to wages paid between September 1 – December 31, 2020, so nothing changes for at least a couple more weeks.
Only the employee portion of Social Security taxes is deferred. Medicare as well as federal, state, and local income taxes are still required to be withheld from employee pay and remitted to the appropriate government agencies on the employer’s regular tax deposit schedule. In addition, employers are still responsible for remitting their full 7.65% match on employee wages.
There are income caps that determine which employees are eligible to defer taxes. Only employees who make less than $4,000 in pre-tax earnings per bi-weekly pay period are eligible to defer their payroll taxes. This equates to an annual pre-tax salary of $104,000 or $2,000 weekly.
The taxes will eventually need to be paid to the federal government. Unlike the payroll tax holidays seen during the Bush and Obama administrations, this tax relief measure is not a permanent exemption from paying the taxes. While President Trump has signaled he would push to have the deferred taxes forgiven if he were re-elected in November, the ultimate authority to provide permanent tax relief lies with Congress. For the time being, it should be assumed that these taxes will at some point have to be paid.
Here are some of the key points we don’t currently know:
Is the deferral mandatory or elective? Given this is a temporary deferral and not a permanent exemption, some taxpayers may wish to keep paying in taxes now instead of being presented with a large bill later. Treasury has been asked to clarify if the program is optional or mandatory. Additionally, requests have been made to include a requirement that employees must sign a statement choosing to either opt in or opt out of the deferral.
When are the deferred taxes due? At this time, there is no indication when the deferred taxes will need to be paid in, other than, at the earliest, some time in 2021.
Who is going to be responsible for remitting the taxes once they become due? This is probably the most crucial unknown at this time. By law, employers are required to both withhold and remit all applicable payroll and income taxes from employee wages and are subject to potentially significant penalties for noncompliance. If employers are going to be held responsible for ultimately remitting the deferred taxes, that presents a number of challenges. Will employers have to start extra withholding on employee wages in 2021 to make up for the previously-deferred taxes? How long will they have to recoup those taxes from employees? What happens if an employee who previously deferred taxes no longer works for the company when it comes time to submit payment? Multiple groups have suggested to Treasury that individual employees should be responsible for payment of the deferred taxes. Were that to happen, the payment could be incorporated into the 2020 individual income tax filings next year.
As with most other things in 2020, the tax landscape is fluid and changes on a daily basis. There are unquestionably other details of this program that will require additional guidance from the Treasury Department. At BatesCarter, we are endeavoring to bring you the most up-to-date information we can to help you make informed decisions in these uncertain times. If you have any questions about the employee payroll tax deferral or other tax law changes, please give our offices a call at (770) 532-9131 and we’ll be glad to address them.