Last week, we told you about President Trump’s August 8 Memorandum (available here) directing the Treasury Department to defer payment of employee-side Social Security payroll taxes for employees making less than $4,000 (pre-tax) per bi-weekly pay period (roughly $104,000 annually). The deferral is slated to begin for any wages paid on or after September 1, 2020, and last through the end of this year. As we detailed in a prior employer update, employers are still required to pay the employer portion of the payroll taxes regardless of any employee deferrals that may occur.
Remember: this a payroll tax deferral, not a tax cut. This means while eligible employees could bring home more of their paycheck in the last quarter of 2020, those tax payments must still be paid in 2021, unless Congress passes legislation to make the deferral permanent.
President Trump directed the Secretary of the Treasury to issue guidance to bring this idea to life. On August 28, 2020, the Department of Treasury issued a 3-page Guidance document (available here). That Guidance answered some of the pressing questions associated with this deferral but leaves others still as yet unanswered.
As of the August 28 Guidance, we know:
- Payroll taxes are still owed for eligible employees. The deadline for payment is simply extended until April 30, 2021.
- Contrary to prior understanding of the President’s Memorandum, which suggested the deferral choice belonged to the employee, the Guidance dictates that deferral is at the employer’s option. Employers are not required to participate, and employers cannot require their employees to defer the employee’s portion of the payroll taxes. There is no penalty for employers who choose not to participate.
- Because the Guidance shifts the option to defer to employers, there is no obligation to take any action to implement this by the first payday of September.
- Employers “may make arrangements” to collect the deferred taxes from employees. In practice, that means so long as you make arrangements for repayment ahead of time, employees will be expected to pay the deferral taxes. If an employee were to separate from employment before repayment, however, that obligation would come back to the employer absent an agreement with the employee.
- It is ultimately the employer’s obligation to pay back any deferred payroll taxes by April 30, 2021.
- The IRS also issued an update Form 941to account for these changes.
We still do not know:
- If an employee can opt out even if the employer chooses to participate in the deferral plan.
- If employers can require employees to participate in the deferral.
- Whether employees may defer portions of the payroll tax (instead of the entire 6.2%) or may defer payroll taxes for less than the entire 4-month deferral period.
The Guidance answers some of the outstanding questions on how to implement the deferral, but serious uncertainty remains. If employers are considering participating in this deferral, be prepared to discuss and, to some extent, advise eligible employees about what is—and is not!—known about the deferral. At a minimum, we recommend communicating clearly, preferably in writing, that deferred taxes will be owed in 2021 one way or another. Some commentators are hypothesizing that employers could even utilize a double withholding strategy in 2021, which could have a tremendous impact on employees’ household income levels.
If you are interested in deferring payroll taxes for your employees, you should reach out to your Labor and Employment or Benefits counsel promptly.