The payroll tax deferral is one of four executive orders President Trump issued on Saturday as a result of the breakdown of talks in Congress. The order defers the withholding, deposit and payment of the employee portion of the old-age, survivors, and disability insurance (OASDI) tax and the Railroad Retirement Act Tier 1 tax for any employee whose pretax wages during any biweekly pay period generally is less than $4,000. This deferral would apply to payroll taxes on wages paid from September 1 through December 31, 2020.
The American Institute of Public Accountants (AICPA) has requested guidance on the payroll tax deferral. Specifically, the AICPA asked for guidance regarding the order by stating certain clarifications for the deferral including:
- Stating that an eligible employee is responsible for making an affirmative election to defer the payroll taxes;
- Stating that an eligible employee can make an affirmative election at any time from Sept. 1, 2020, to Dec. 31, 2020, and if an employee does not elect to defer Social Security taxes, taxes will continue to be withheld, deposited, and paid;
- Stating that an “eligible employee” is an employee whose wages are less than $4,000 (or equivalent amount depending on the employer’s pay period) per biweekly period;
- Providing a model notice for employers to furnish to eligible employees to inform them that the election to defer Social Security taxes is available for the Sept. 1, 2020, to Dec. 31, 2020, period;
- Stating that the payroll amount used to determine eligibility is a cliff; if the wage amount for a specified pay period is above $4,000 or the equivalent amount based on the employer’s regular payroll periods, no deferral is permitted;
- Stating that the $4,000 limit should apply separately to each employer of an employee;
- Stating that it is the responsibility of the employee and not the employer to pay the deferred payroll taxes;
- Stating which penalties are waived as a result of this deferral, including the penalty applicable to responsible parties;
- Addressing whether the increase in take-home pay attributable to the deferred taxes can be used to satisfy other employee obligations such as Sec. 401(k) loan repayments, garnishments, and child support payments; and
- Stating a payment due date(s) for the deferred taxes and a mechanism for employees to pay the deferred taxes.
Without further guidance and clarification on this payroll tax deferral, employers will be hard-pressed to comply with the executive order. Even with the clarifications, there is concern that payroll companies and software will not have enough time to change their software to allow for the deferral in a timely manner.
This deferral is only for the employee portion of the payroll taxes as the CARES Act already provided a deferral of the portion of the social security taxes for employers.
There are many questions regarding the repayment of these employee taxes with President Trump indicating he will try to make the deferral permanent if he is reelected. If that happens, there is a concern over how these funds will be replaced so that the social security trust fund continues to be funded with enough money to avoid a cut in benefits to individuals receiving benefits currently and in the near future.
We will continue to keep you updated. Should you have any questions, please don’t hesitate to reach out to your tonneson + co representative.