Effective Sept. 1, a presidential memorandum took effect that enables employers to temporarily defer Social Security payroll taxes to provide employees with a higher income through the end of this year. The reason has to do with the ongoing threat of the coronavirus. “American workers have been particularly hard hit by this ongoing disaster. While the Department of the Treasury has already undertaken historic efforts to alleviate the hardships of our citizens, it is clear that further temporary relief is necessary to support working Americans during these challenging times,” the memorandum reads.
It was less than a month between the memorandum and the effective date, and other than scant guidance from the Internal Revenue Service, both employers and employees have been left to figure out how and whether to implement the President’s order.
Payroll taxes, by the way, involve a 12.4% payroll deduction to fund Social Security and a 2.9% deduction to fund Medicare. Employers and employees split the responsibility for these costs. Social Security taxes are subject to a wage cap that is adjusted annually (the amount is $137,000 this year). The Medicare tax does not have a cap.
Here’s what we know about the President’s memo so far:
- The payroll tax “holiday” runs from Sept. 1 through Dec. 31, 2020.
- It applies only to employees who make less than $4,000 for a biweekly pay period. This includes salaried employees who make less than $104,000 per year.
- Employers that defer collecting payroll tax from employees will need to pay that money to the government by April 30, 2021, meaning that from Jan. 1 through April 30, they would have to collect additional payroll taxes from employees to make the government whole.
- If your employer participates in this program, you will still owe the taxes, even if they aren’t withheld from your paychecks through the end of the year. Be sure to plan accordingly.
What we don’t know at this point will make this a much longer blog post. Users of Intuit’s Quickbooks received this notification on Sept. 1, letting customers know that the company is seeking clarification from the IRS on how to implement the order. Employers who maintain their own payroll systems are likely also wondering how quickly they will be able to implement changes to their systems.
Interestingly, the president’s memo and the IRS guidance don’t indicate that the payroll tax suspension is mandatory for all employers, causing some to say they’ll treat it as voluntary. However, if an employer does decide to participate, the guidance also does not discuss allowing individuals to opt out, an issue that was raised as a concern by employers when the President issued his memo.
If an employee leaves his or her job at the end of the year, is the employer stuck holding the bag for the taxes the employee would owe next year? The IRS’s guidance says employers “may make arrangements to otherwise collect the total applicable taxes from the employee.” The employer is still responsible for paying the employee’s share of the Social Security taxes, but without an agreement with the departing employee, it may have to pursue collections or other legal means to recoup the deferred amount.
The Takeaway, For Now
The most important thing to know for now — if you are a qualified employee whose employer participates in the deferral program — is that while your paycheck may seem larger through the end of the year, it’s not a gift from the government (even though White House economic adviser Larry Kudlow hinted at legislation to forgive the deferment later). Your best course is to make sure you can withstand a smaller paycheck when it comes time to collect the tax starting in January.
As often happens, it’s possible we’ll see some additional guidance from the IRS in the coming weeks. AMDG Financial and AMDG Business Advisory Services are continuing to learn the implications of the President’s order, and we’ll keep you posted with any new developments. In the meantime, please feel free to contact us if we can be of assistance.