When President Donald Trump issued the Memorandum on Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster (Executive Order) on August 8, 2020, it introduced new workforce concerns during an already emotionally charged election year. Because it is an Executive Order, it places the Secretary of the Treasury, Steven Mnuchin in a position where he must use his authority to defer the withholding, deposit, and payment of the 6.2 percent Social Security tax on applicable wages/compensation paid between September 1, 2020, and December 31, 2020, under the conditions outlined in the order. Here we look at the order and how you should handle those conditions.
What is the Memorandum on Deferring Payroll Tax Obligations?
The memorandum addresses the withholding deferral which is only to be applied to employees with wages or compensation payable during a bi-weekly pay period that “generally” is under $4,000, calculated on a pre-tax basis (or the equivalent amount related to other pay periods). Right now employees contribute 6.2% of their income to the Social Security tax up to an annual limit of $137,700 in 2020.
They also pay Medicare tax which will not be affected by the memorandum. Instead, the memorandum stipulates the amounts deferred “shall be deferred without any penalties, interest, additional amount, or addition to the tax.” As well, the order indicates the Treasury Secretary should “explore avenues, including legislation, to eliminate the obligation to pay the taxes deferred pursuant to the implementation of this memorandum.” This leaves organizations seeking guidance from the IRS.
Will a Per-Payroll Limit Be Enforced?
You will want to know if there is a per-payroll limit, an annual limit, or a combination of both. These are two different scenarios:
- Per-pay period: With a limit of $4,000 biweekly that leaves a maximum tax deferral of $2,232 on the nine biweekly pay periods beginning September 1 and ending December 31.
- Annual limit: With an annual limit of $104,000, the maximum tax deferral during the same period for an employee without prior earnings would be $6,448.
As you can see this can be very confusing if HR and payroll professionals don’t know which one applies, or if both do.
Will Deferrals Be Adjusted?
In the case where employees experience fluctuations in their wages, they could find themselves going above and/or below the limit. In some cases, they might pay 6.2%, but then in subsequent pay periods, they might qualify for deferral of Social Security taxes. In these cases are employers on the hook to refund withheld funds since this means this can affect average earnings that could then be less than $4,000?
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Do Deferrals Apply to Wage Incomes?
If an employee were to be eligible for the deferral based on their wages, yet have additional non-wage income, would this disqualify them from the deferral? Organizations need to know if the deferral only applies to wage income.
Are There Reporting Requirements?
Employers need to understand if the IRS will apply reporting requirements for employers for any wages associated with the deferral. How will you report qualified Social Security wages paid during the deferral period? Separately? On Form W-2 and Form 941? Is there other information required as well?
How to Handle Your Concerns
As you can see there is far too much information missing at this point to make it easy for employers to implement changes. Without confirmation for so many important details, it is almost impossible to effectively introduce new payroll processes. For this reason, it’s not recommended that employers take immediate action to apply the deferral.
Despite the absence of subsequent legislation, you still have to review implementing guidance provided by the Secretary of the Treasury. You should assess any risks in applying the deferral of the employee portion of the Social Security tax, as this stands a good chance of ultimately being withheld from future employee wages/compensation. Keep in mind deciding not to execute the deferral as it is described in the Executive Order is not unreasonable since it introduces risks of not being able to withhold the deferred taxes from future income.
Instead, you should monitor applicable guidance without making changes to your current payroll withholding processes. Although you might be anxious to get changes underway knowing it will take time to implement a new process, there is still too much uncertainty about the order to justify taking action just yet.
Paypro can help you develop proactive strategies to address the order once it is clarified and the new rules are confirmed.
About The Author
Ingrid is the Content Marketing Manager at Paypro, managing both inbound and outbound marketing initiatives for the company. She has 15+ years’ of extensive marketing communications experience, leveraging brand awareness and strategic partnerships to increase sales revenue for a diverse group of B2B brands.