On August 8, 2020, President Trump issued a memorandum to the Secretary of the Treasury authorizing the deferral of payroll taxes for certain employees from September 1, 2020 through December 31, 2020. Unfortunately, the memorandum leaves many more questions than answers for employers, making participation in the program an uncertain endeavor. The below discussion highlights what we know so far and what we need to learn before September 1st.
What We Know
While the memorandum’s language implies that the deferral is mandatory, the Department of Treasury has confirmed that employers will not be required to comply with the memorandum. If employers wish to comply, a deferral of an employee’s share of Social Security tax (not Medicare tax) is available with respect to any employee “whose wages or compensation, as applicable, payable during any bi-weekly pay period generally is less than $4,000…” (about $104,000 annually).
Although the memorandum directs the Department of Treasury to explore eliminating the underlying tax liability, that result is highly unlikely, and it is clear that this truly is just a deferral of these taxes, although when they would be due is unclear.
What We Do Not Know
Aside from the above, very little is known about the actual implementation of this program. The American Institute of CPAs (AICPA) has sent a letter to the Department of Treasury and the IRS asking for guidance in a variety of areas, and various tax practitioners have weighed in with their own questions. Some of the main areas needing guidance include:
- Confirming that the deferral is voluntary and that an “eligible employee” must “opt-in”;
- Determining “eligible employees” with respect to employees with fluctuating income;
- Stating a payment due date(s) for the deferred taxes and a mechanism for employees to pay the deferred taxes;
- Clarifying whether an employer faces penalties for erroneously deferring payroll taxes for an ineligible employee; and
- Providing tools and forms to track these items. For example, the IRS may need to modify various forms to track the deferred taxes and provide a mechanism for repayment.
For both administrative and liability reasons, we presently recommend that our clients wait for further guidance before acting on this program. Due to the time it would take a payroll company to make significant changes like the ones required here, coupled with the fact that any deferral is optional, the conservative approach is to wait for guidance before trying to implement whatever changes would be needed to implement this program. As for your potential liability as an employer, under existing law, you will remain liable for the (deferred) payment of the employee’s share of Social Security taxes even if you cannot later recoup the tax. To make matters worse if that happens, your payment of the employee’s share of payroll taxes would generally be an additional wage, triggering additional payroll taxes. For these reasons, we recommend caution in taking advantage of this program, at least until the IRS or Treasury issues further guidance.
Our firm is here to discuss any information or considerations you may have from this recent legislation. Contact any one of our tax professionals so that we can provide you with sound, trusted advice for your future.