Executive Order on Tax Deferrals Explained

On August 8, 2020 President Trump issued an Executive Order allowing the deferral of payroll tax obligations due to the continuing Covid-19 crisis.  Last Friday, the IRS issued guidance related to the implementation of this Order (Notice 2020-65).  The Order allows employees to defer the withholding of Social Security taxes (6.2%) beginning September 1, 2020 and continuing until December 31, 2020.

Here are some important things to know:

• This is optional for both the EMPLOYER and the EMPLOYEE The deferral is only available to employees that make less than $4,000 on a bi-weekly basis (approximately $104,000 annually)
• This is a deferral.  The applicable taxes will have to be repaid by withholding “double” social security taxes (12.4%) next January through April in 2021.
• The responsibility for remitting the deferred taxes in 2021 is with the EMPLOYER. If an employee terminates before the deferred taxes have been repaid, the employer may withhold the entire unpaid portion from the employee’s final check.
• Form 941 will be revised (again) to report the deferred amount of employee Social Security tax.

As a practical matter, this seems like a record-keeping nightmare for employers resulting in a temporary increase in take home pay for employees only to be offset by a corresponding decrease in net pay over the next four months thereafter.

As a prudent employer, why would you want to do this?  Here’s why you need to consider it:

President Trump has stated that he will ask Congress to forgive these deferred taxes if he wins re-election in November.  Although this is not part of the Executive Order or official IRS Guidance, it has been widely reported.  Communicating the points above to your employees will help them make a more informed decision about their withholding for the rest of 2020.

We will continue to keep you informed as additional guidance is issued.