President Trump’s executive order on August 8, 2020, directing the Treasury Department to allow an employer to defer an employee’s payroll taxes from September through the end of the year, came with plenty of political bluster, but no real guidelines for employers. On August 29, the Treasury the Treasury Department came forth with rules on the tax deferral, but answers were few, and companies and business organizations remain confused.
Under the new guidelines, employers may defer withholding the employee share of the 6.2% social security tax from September 1, 2020 to December 31, 2020. Then, they would be required to remit them during the period beginning on January 1, 2021, and ending on April 30, 2021. The employer’s share would still be due. A threshold for wages subject to the deferral would be for employees who make less than $4,000 during any bi-weekly payroll period.
How would this employee tax deferral be implemented? Essentially, employers would stop withholding employee payroll taxes during the 2020 deferral period, thus increasing an employee’s take-home pay. But, then it would need to withhold the deferred employee social security taxes during the 2021 repayment period, thus reducing the employee’s take-home pay. To settle up, an employer would have to essentially double the payroll tax withholding in 2021.
How would employees feel about a tax “benefit” in 2020 that would be fully repaid in 2021? Not that happy. There are other complications. What if an employee that deferred payroll taxes in 2020 left to go work for someone else? How would the employer collect the back taxes from them? Businesses in industries with high turnover, such as the restaurant business, could find themselves on the hook for paying the deferred taxes themselves if the departed employees couldn’t pay them.
In a letter to the Treasury Department on August 12, the American Institute of CPA’s asked that employees be required to make an “affirmative election” to defer the payroll taxes, thus placing the burden of repayment on the employee. The rules issued by the Treasury Department yesterday, contained no such requirement.
The U.S. Chamber of Commerce and other business organizations, including the National Restaurant Association, are urging Congress to forgive the deferred payroll tax liability and not make employees pay it back. In a letter to Speaker Nancy Pelosi, Majority Leader Mitch McConnell, and Treasury Secretary Steve Mnuchin, the chamber said the deferral “threatens to impose serious hardships on employees who will face a large tax bill as a result of deferral.”
Congress isn’t back in session until September 14 and most businesses will be processing one, if not two payrolls by then. What should employers do until then? Our advice is to continue withholding payroll taxes until either the Treasury Department provides more guidance or Congress decides to forgive the taxes.