On August 8, 2020, President Trump signed the Executive Order, Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster. This executive order allows employers to defer the employee portion of Social Security payroll taxes for certain individuals in the final four months of 2020. On August 28, 2020, the Internal Revenue Service (IRS) issued Notice 2020-65, which provides additional guidance for employers on the implementation of the executive order.
The intention behind the executive order deferring payroll tax is to provide additional relief for employees working through the coronavirus pandemic. According to the Presidential Memorandum, Trump is "directing the Secretary of the Treasury to use his authority to defer certain payroll tax obligations with respect to the American workers most in need. This modest, targeted action will put money directly in the pockets of American workers and generate additional incentives for work and employment, right when the money is needed most."
Important Details: Who, What, and When
Who is covered?
According to the Presidential Memorandum, "the deferral shall be made available with respect to any employee the amount of whose wages or compensation, as applicable, payable during any bi-weekly pay period generally is less than $4,000, calculated on a pre-tax basis, or the equivalent amount with respect to other pay periods." This equates approximately to a $104,000-a-year salary ($4,000 biweekly * 26 pay periods per year).
IRS Notice 2020-65 further clarifies that the determination of total wages is made on a pay-period-by-pay-period basis, which may disqualify the same employee in certain pay periods based on overtime wages or other bonus pay. Additionally, if an employer pays wages on a basis other than biweekly, the $4,000 threshold must be recalculated as an “equivalent amount with respect to other pay periods."
Which payroll taxes are deferred and how much do you get?
The Executive Order applies only to the employee portion of Social Security payroll taxes (6.2%). Employee Medicare payroll taxes (1.45%), employer Medicare payroll taxes, (1.45%) and the employer portion of Social Security payroll taxes (6.2%) are not included in the Executive Order. Additionally, the deferral does not apply to the parallel Social Security taxes owed by self-employed individuals via self-employment taxes.
When is the effective date?
The employee portion of Social Security payroll taxes on wages paid during the period of September 1, 2020 to December 31, 2020 are allowed to be deferred without incurring any penalties, interest, additional amount, or addition to the tax. Employers who choose to defer these taxes will not withhold the funds or pay the taxes to the IRS as typically scheduled.
Rather, the deferred taxes will be due ratably over the time period from January 1, 2021 to April 30, 2021. According to the supplemental detail in IRS Notice 2020-65, "interest, penalties, and additions to tax will begin to accrue on May 1, 2021, with respect to any unpaid applicable taxes."
Is this Optional or Mandatory?
This guidance is optional for private sector employers. It is likely that the administrative costs will be a deterrent for many small businesses. It takes time to process changes in a payroll system, and there may be additional manual tracking required to ensure specific situations are accounted for correctly.
As the United States’ largest employer, the federal government will defer its employees' portion of their Social Security taxes in order to provide immediate relief during the pandemic. There is no option to opt out for federal employees; and the plan is to implement these deferrals as of the second pay period in September. This includes all branches of the military, as well as civilian jobs with the federal government.
Political Involvement Surrounding the Executive Order
The Presidential Memorandum includes language that hints at the potential for future tax forgiveness. "The Secretary of the Treasury shall explore avenues, including legislation, to eliminate the obligation to pay the taxes deferred pursuant to the implementation of this memorandum." The Trump administration has been pushing for the forgiveness of all deferred Social Security taxes, but that power lies solely with the legislative branch.
Rep. Kevin Brady (R-TX), of the House Ways and Means Committee, told reporters on September 2, 2020, that he intends to introduce legislation to accomplish Trump’s goal. However, there is no guarantee that Congress will pass legislation to forgive the deferred taxes.
The Executive Order itself was the result of a congressional stalemate surrounding a potential additional coronavirus relief package. Rep. John Larson (D-Conn), the House Ways and Means Committee's Social Security Subcommittee Chairman, introduced legislation, the Save Our Social Security Now Act, that would overturn the executive action and put a halt to the deferral of Social Security taxes.
Implications for Employees
As a result of the uncertainty in current guidance and possible future legal changes surrounding this measure, here are a few things you need to know if your employer is making these deferrals on your behalf.
You may see less take-home pay in early 2021
This Executive Order was written as a deferral, which means the payroll taxes that are deferred by your employer now will be due at a future date. As of this writing, it is most likely that employers who choose to defer taxes from September to December 2020 will end up withholding double taxes from January to April 2021 to recoup the amount.
Specific concerns for individuals changing jobs
Because the deferred taxes from September to December 2020 will be taken out in January to April 2021, this poses specific risks to anyone planning on (or forced to) change jobs in that time frame. For example, Employer A may be deferring the employee portion of your Social Security taxes. If you leave your job in November 2020 and start another job with Employer B in January 2021, you may run into some issues because the deferred taxes were not able to be withheld from your paychecks from January to April 2021.
The supplemental IRS guidance, Notice 2020-65, issued on August 28, 2020 is brief, and it did not answer all of the questions that business owners and tax professionals have about implementation. One of the issues that wasn’t answered was how employers should collect deferred payroll taxes from employees who separate from the company before the end of April 2021, when deferred payroll taxes are to be fully recouped. The IRS Notice 2020-65 states that, if necessary, employers can make arrangements to otherwise collect the taxes from employees.
If you suspect that you may be in this situation, whether via a furlough, layoff, or planned resignation, you should plan for—and anticipate—repaying the 6.2% of your wages during the time period the deferral was in effect.
Criticism of the Executive Order
Critics of the executive order have claimed that the deferral of certain payroll taxes does nothing to help those hardest hit by the coronavirus pandemic: individuals who have been furloughed, laid off, or are otherwise unemployed. Some 13.1 Million Americans are currently unemployed as of August 2020, based on a U.S. Bureau of Labor Statistics Employment Situation News Release. Because these individuals do not pay payroll taxes, the deferral does not affect or benefit them.
Impact on Social Security
According to the House Committee on Ways and Means, the executive order "does not affect the Social Security's Trust Funds, as the taxes are only deferred." Because the tax has not been eliminated, as it will be paid back in early 2021, it should have no impact on the Social Security Trust Fund. If Congress is able to come to an agreement on legislation that allows for the forgiveness of the deferred taxes, consideration will have to be given as to how to fund the gap in the Social Security Trust Fund.