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Today is the first day of the President’s Employee Payroll Tax Deferral program. While some guidance was put out on Friday last week, we are still left with more questions than answers. As many of you have questions also, we wanted to send this email to go over what we know now and considerations for you and your businesses.
In an August 8th memorandum from President Trump, the President ordered for a deferral of certain payroll tax obligations for employees making less than $4,000 bi-weekly beginning September 1, 2020 and ending December 31, 2020, and directed the Secretary of the Treasury to issue guidance to implement the memorandum. Last Friday, August 28, Treasury released Notice 2020-65 providing guidance.
How do you determine who is eligible?
Employees who make less than $4,000 during any bi-weekly pay period (or $104,000 per year annualized) are eligible. Wages paid September 1 through December 31 are eligible, “but only if the amount of such wages or compensation paid for a bi-weekly pay period is less than the threshold amount of $4,000, or the equivalent threshold amount with respect to other pay periods.” Thus, employers must look to wages by pay period, irrespective of other periods, and the $4,000 (or equivalent) is basically a cliff. Someone who earns $4,001 for that period is not eligible for the deferral in that pay period on any part of his or her wages.
When is deferred tax due?
It is critical to understand that, at this point, this is a tax deferral and the deferred tax will need to be repaid. The deferred taxes are due ratably from Jan. 1 through April 30, 2021. This means employees will save 6.2% on wages Sept. 1 through Dec. 31 and then need to pay 12.4% Jan 1 through April 30 in order to repay the deferred taxes and avoid penalties and interest.
How do employees pay it back?
This is still a bit of an unanswered question, however it currently seems like the employers will be responsible for withholding the additional social security tax amounts Jan 1 through April 30, 2021 in order to make the repayments. The Notice states, “If necessary, the Affected Taxpayer [i.e. the employer] may make arrangements to otherwise collect the total Applicable Taxes from the employee.” This might include an employer offering employees a longer ‘payroll loan’ with the employer depositing the deferred social security taxes within the time frame. However, the ‘other arrangements’ language may also be an instruction to employers whose employees have separated service before the repayment period is over. This language seems to leave the employer on the hook for repayment if they are unable to collect from a former employee.
Is it mandatory?
On August 12 Treasury Secretary Steven Mnuchin announced publicly that the deferral would not be mandatory. In other words, employers can choose to continue to withhold and remit this tax, despite a delayed deadline. Information Release 2020-195 also issued on Friday describes the Notice as “allowing employers to defer,” but nothing states that it is required.
Thoughts, Considerations and Questions
The late release of this information, along with so many unanswered questions, makes it very difficult for an employer to defer withholding on eligible pay for the entire four month period. Those employers willing to follow the Notice and implement it as soon as possible or for those thinking about implementing this for employees, here are some considerations and questions:
- Employers potentially may have to cover the tax for employees who defer and then are terminated or leave before repayment.
- Will employers allow eligible employees to choose whether or not to participate, creating additional administrative burden with some deferring and some not?
- Although this is a deferral now, Congress has the authority to pass legislation to forgive the deferrals. If an employer does not defer employees payroll tax and then deferrals are later forgiven by Congress, what is employee recourse?
- If an employee terminates employment while still owing deferred taxes, can an employer do catch-up withholding from the final paycheck?
- Can an employer require an employee to sign a promissory note for the deferred tax amount?
- Whether employers choose to follow the Notice or not, they should strongly consider letting their employees know whether deferral will be an available option, as many individuals are aware of the President’s action and may expect increased paychecks.
Our Team continues to follow the latest updates and will do our best to keep you informed.