Tax Insights

Your Guide to State, Local, Federal, Estate + International Taxation

Presidential memorandum defers payroll taxes, with a big caveat

On August 8, President Donald Trump signed three Memoranda and one Executive Order in response to the growing need for additional economic aid amidst the Coronavirus Pandemic and resulting economic stress. In addition to extending unemployment benefits at a reduced rate, extending the Federal ban on evictions, and additional deferral of student loan payments, the most eye-catching piece is a deferral of payroll taxes, something the President has been pushing for months, amidst cool reception from both sides of the aisle.

Don’t miss: Lower Income in 2020? – Here is a positive view

The Payroll Tax Memorandum empowers Treasury Secretary Mnuchin to provide guidance to employers who wish to voluntarily defer the payment of the employee’s share of payroll taxes (Social Security) for pay periods between September 1-December 31, 2020. The deferral applies to employees making less than $4,000 per bi-weekly pay period, or $104,000 annually.

It is very important to note at this point that the deferral is just that – a deferral – and not a payroll tax holiday. That means that in January 2021, the deferred taxes would be owed in full, and if they are not withheld by the employer, the employees will be on the hook – how exactly that would look remains to be seen.

Other issues have been brought to light, such as what happens if an employee leaves their job during the deferral period, or if an employee has no payroll tax withholding thru December, but has essentially double withholding starting in January to cover the deferral period (assuming no holiday is granted). Paychecks would be reduced greatly in that scenario, and could catch unknowing taxpayers off guard.

The president has hinted that he will explore options to provide a payroll tax holiday for the covered period at a later date, but the ability to do that without the actions of Congress is very likely to be challenged in courts.

At this point, we are awaiting guidance from Treasury as to how clients should proceed, but our initial thought is that nothing should change from a payroll withholding standpoint in an effort to mitigate the issues presented above – employers should continue to withhold the employee share of payroll taxes and build a deferral “fund”, with the intent to pay in the entire deferral when it becomes due in January.

Stay tuned for further guidance on this and additional tax matters related to Coronavirus relief. Contact your Henry+Horne tax professional for more details. For more information and resources on COVID-19, see our coronavirus page.

Brock R. Yates, CPA, MT