The most significant tax-related executive action is the “Memorandum on Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster.” Taxpayer be wary, this order does not revoke your obligation to pay payroll taxes; it merely postpones the taxes to be due at a later date. The tax deferral period is from September 1, 2020, through December 31, 2020. In essence, this means that during these four months, you do not have to pay the 6.2% employee share of Social Security (FICA) taxes.
The Medicare tax portion of payroll taxes (1.45% of wages plus an additional 0.9% for wages over $200,000) are not included in the deferral and therefore will need to be withheld and deposited as usual during this deferral period. Furthermore, the 6.2% FICA taxes still accrue during this period and become due after December 31, 2020. It is important to understand that this is only a deferral, so as to not be hit with a large tax bill for unpaid payroll taxes at the end of the deferral period.
The payroll tax deferral is available to an employee whose compensation payable during any bi-weekly pay period is generally less than $4,000 on a pre-tax basis (or the equivalent amount with respect to other pay periods). This equates to approximately $104,000 in annual compensation for 2020. Per IRS Notice 2020-65 (“the Notice”) posted on August 28, 2020, “Applicable Wages” are essentially wages and compensation that are eligible for the payroll tax deferral.
The determination of Applicable Wages” is made on a pay period-by-pay period basis. Therefore, if wages or compensation payable to an employee for a pay period is less than the $4,000 bi-weekly threshold amount (or other pay period equivalent), the wages for that specific pay period will be considered Applicable Wages and eligible for the payroll tax deferral, even if the threshold is not met for a different pay period.
Also per the Notice, for the payment of the Social Security taxes (and their railroad equivalent) which were deferred, they must be paid by the employer ratably from wages and compensation paid between January 1, 2021, and April 30, 2021. If not properly withheld and paid by the employer during this period, interest, penalties, and additions to tax will start to accrue on May 1, 2021. In short, employees would pay no Social Security taxes until December 31, 2020, and then begin to pay double the amount until April 30, 2021. It is explained in the notice that an employer may also make arrangements to collect the taxes from the employee if necessary, however, it does not provide any guidance on how the employer would otherwise be able to collect the unpaid taxes from the employee.
If an employee is not employed for the full four-month period through April 30, 2021, the employer is still technically liable to collect any and all amounts deferred from the employee. For example, the Social Security taxes for an employee from September 1, 2020, through December 31, 2020, are deferred. Per the notice, these deferred taxes should be collected ratably from January 1, 2021, through April 30, 2021. However, if the employee is terminated or resigns in March 2021, the employer still must collect all four months-worth of deferred Social Security taxes.
Treasury Secretary Steven Mnuchin has described the payroll tax deferral as optional for employers. Therefore, it is up to the employer to determine whether or not the payroll tax deferral will be implemented, and employees do not have the option to participate by their selves. Furthermore, employers may not adjust prior period payrolls in which Social Security taxes were withheld if the deferral is set in place after September 1.
As of this writing, significant unanswered questions surround the payroll tax deferral. If you have questions regarding how this deferral applies to your situation, please contact your local Blue & Co. advisor.