Payroll Tax Deferral: Recent Presidential Executive Orders

Payroll Tax Deferral: Recent Presidential Executive Orders

On August 8, 2020, President Trump signed the Memorandum on Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster.

Highlights of this memoranda on payroll tax deferral include:

Section 2. Deferring Certain Payroll Tax Obligations.  The withholding, deposit, and payment of the tax imposed by 26 USC §3101(a), and 26 USC §3201 as is attributable to the rate in effect under 26 USC §3101(a), on wages or compensation, as applicable, paid during the period of September 1, 2020, through December 31, 2020.

Note.  This section of the memoranda concludes that employees may elect to defer the withholding of social security taxes only, currently calculated at 6.20% of gross payroll on the first $137,700 of payroll earned by the employee.

Conditions of the Payroll Tax Obligation Deferral:

Gross payroll (pre-tax) must be less than $4,000 on a bi-weekly basis.  The equivalent of this amount can be adjusted for other payroll frequencies.

Note.  The limit’s impact is to make the deferral of payroll taxes only available to those employees earning $104,000 annually or less.  Additional guidance is needed from the IRS to determine if this limit is per employer or on the total earnings an employee receives in 2020.

Example 1.  Jack Lost earns $60,000 annually as an employee of ABC Trucking. Jack also earns $50,000 per year as an employee of Tito’s Bar and Grill.  It is not certain if Jack would qualify to defer withholding of social security taxes from either or both employers or if he does not qualify because his aggregate annual earnings from all employers exceeds $104,000.

Example 2.  Julie DeMoss is a salaried employee of Now You Sign, Inc.  Her annual salary is $100,000.  Even though Julie is paid monthly, she still qualifies to have her payroll tax withholding deferred if she wishes for the period September through December 2020. This is because her annual salary, if divided over 26 bi-weekly periods, is $3,846.15 ($100,000 / 26 bi-weekly payrolls) which is less than the $4,000 threshold.

Example 3.  Use the same facts as in Example 2, except Julie’s annual salary is $120,000.  Julie does not qualify to defer her payroll tax withholding for social security because her salary, calculated on a bi-weekly basis, is more than $4,000 ($120,000 / 26 bi-weekly payrolls = $4,615.38)

Note.  IRS Notice 2020-65, discussed later, indicates the determination of applicable wages is made on a pay-period-by-pay-period basis.  Therefore, if the amount of compensation payable to an employee for a particular pay period is less than the threshold amount ($4,000 for biweekly pay periods), then the payroll tax deferral applies to that compensation, without consideration of the amount paid to that employee in other pay periods.

Example 4.  Use the same facts as Example 3.  Julie decides to reduce her work schedule during the last four months of 2020 to spend more time at home.  Her monthly salary is reduced to $3,800.  Using the guidance of Notice 2020-65, it appears Julie qualifies to defer withholding of social security taxes for the last four months of 2020 if she desires.

• Payroll taxes deferred shall not incur any late penalties, interest, additional amount, or addition to the tax.

The mechanics of the repayment of deferred payroll taxes was not addressed on the Memoranda, however, Section 4 states:

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.

On August 28, 2020, the IRS released Notice 2020-65  to provide the mechanics for the Presidential Memorandum’s implementation, assuming that payroll deferrals will not end up being eliminated.

The Notice:

• Confirms the payroll maximum mentioned earlier, of $4,000 on a bi-weekly basis as the threshold for this option.
• The IRS provides a timetable for the repayment of payroll taxes deferred.  According to the Notice, repayment of the deferred taxes is to occur ratably between January 1 and April 30, 2021.

Example 5.  Use the same facts as Example 2.  Julie decided to defer her social security taxes from September 1 through December 31, 2020.  Julie’s annual payroll was $100,000.  During the deferral months, September through December 2020, Julie was able to defer $2,066.67 of social security taxes. ($100,000/ 12 months = $8,333.33 per month.  $8,333 × 4 months (Sep-Dec) = $33,333.33.  $33,333 × 6.20% = $2,066.67).    Beginning with her first payroll in January 2021, in addition to her normal withholdings, Julie’s employer must withhold an additional $516.67 each month (assuming Julie is still paid monthly) to comply with the IRS guidance to have the deferral repaid ratably between January 1 and April 30, 2021 ($506.67 × 4 months = $2066.67).

Note.  It is also unclear how new employers are to handle employees who join them in 2021 when the employee had payroll taxes deferred in 2020 from a former employer.

Example 6.  Use the same facts as Example 2.  Julie decided to take advantage of the deferral of payroll taxes during the last four months of 2020.  Julie resigned from Now You Sign, Inc. on December 31, 2020.  She immediately began working at When We Sign Inc. on January 2, 2021.  Julie mentions nothing to the new employer about her decision to defer her payroll taxes at her former employer during the last four months of 2020.  Who becomes responsible for the remittance of the deferred payroll taxes? Additional guidance from the IRS is needed.

• Penalties and interest will begin to accrue on unpaid deferred amounts on May 1, 2021.

We’ll think about that tomorrow…

Sources:

Memorandum on Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster.  Budget & Spending.  Aug. 8,2020.  [whitehouse.gov/presidential-actions/memorandum-deferring-payroll-tax-obligations-light-ongoing-covid-19-disaster/] Accessed on Aug. 30, 2020.

Contribution and Benefit Base.  Social Security Administration (SSA).   [ssa.gov/oact/cola/cbb.html]  Accessed on Aug. 30, 2020.

IRS Notice 2020-65. IRS.  [irs.gov/pub/irs-drop/n-20-65.pdf] Accessed on Aug. 30, 2020.

by Tom O’Saben, EA