Payroll Tax Executive Order

Several weeks ago the President signed a payroll tax executive order to defer certain payroll taxes. Most of us expected Congress to agree on another stimulus bill that would supersede this executive order. Because there has been no agreement, the President’s executive order for a payroll tax deferral/holiday will take effect today (September 1st).

On Saturday, the Internal Revenue Service issued Notice 2020-65 providing guidance on this payroll tax deferral. The notice clarifies the due date for the 6.2% employee share withholding and payment of Social Security taxes on certain Applicable Wages is postponed until the period beginning on January 1, 2021 when the deferred taxes would have to be repaid over the next 4 months. The President says that the government will forgive the deferred tax amount if he is reelected.

Unanswered Questions

The IRS Notice leaves many questions unanswered and creates potential liability for employers.

  1. What happens if Trump gets reelected and the government forgives the deferred taxes? What about those employees who did not elect to defer the tax? Will they be entitled to a refund?
  2. What if an employee who elects to take the deferral of the tax is no longer employed after December 31? We know that the employer will be liable for payment of this tax. Will the employer have the legal right to collect the tax from an ex-employee if the deferral is not forgiven?
  3. What if the employer decides not to participate in the payroll tax deferral/holiday? Does the employee have a legal right to demand it?

Our Recommendation

  1. Allow your eligible employees to choose not to participate in the payroll tax deferral. The employer will withhold pay over the tax as usual.
  2. For employees who choose to defer the payroll tax, the employer should treat the deferral as an advance on payroll and set up a repayment plan starting in January.

What are Applicable Wages?

The deferral may be applied only on wages or compensation paid to an employee during the period beginning on September 1, 2020, and ending on December 31, 2020, where the amount of such wages or compensation paid for a bi-weekly pay period is less than the threshold amount of $4,000, or the equivalent threshold amount with respect to other pay periods (defined in the Notice as “Applicable Wages”).

Please contact us with any questions.