Deferral of Payroll Taxes for Employees: Let’s Give Them Something Else To Talk About!

As if HR and payroll haven’t already had their hands full since the beginning of the year, on August 8, 2020, President Trump issued a memorandum that addresses deferring certain payroll tax obligations for employees beginning on September 1, 2020, through the remainder of the calendar year.

In the memorandum, President Trump states, “I am directing the Secretary of the Treasury to use his authority to defer certain payroll tax obligations with respect to the American workers most in need.  This modest, targeted action will put money directly in the pockets of American workers and generate additional incentives for work and employment, right when the money is needed most.”

The deferral applies to employees who earn less than $104,000/per year. Also, the deferral appears to relate to the employee’s portion of Social Security, meaning employers will have the responsibility of not withholding the employee’s share (6.2%) from wages but will continue to pay in the employer’s 6.2% share. It appears as if the Medicare payroll tax won’t change for employees or employers. It is not clear if an employee can opt-out of this deferral, more guidance is expected.

One important note is deferral does not equal tax forgiveness; the notice currently makes it only a postponement. Employees are going to start asking questions like:

  • Can I opt-out of the deferral, or is it required?
  • Will these taxes be forgiven?
  • If my payroll taxes are deferred, what will happen when I go to file in 2021, will I have to make a balloon payment?

Nationally, CPAs have pushed for answers regarding whether deferring payroll tax obligations was mandatory. While not all of their questions were answered in the letter they sent, treasury Secretary Steven Mnuchin has indicated that the payroll tax deferral would not be mandatory for employers to implement, and employees can opt out. Still, further guidance is needed.

Employers will also have questions as we get closer to September 1. Since technical aspects of how the deferral and payment process would be implemented remain for the Secretary of Treasury to determine, there may be some snags related to the implementation of this deferral in our payroll systems.

So now what?  Employees may start contacting HR and/or payroll to provide guidance on what this means for them and their individual tax obligation. As a rule, we suggest not giving tax advice to employees and instructing them to contact their tax advisor directly, however, the reality is they expect you to know or at least understand. A good response is, “we are awaiting further guidance and will communicate to employees once we have the necessary information to move forward.”