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With Congress unable to agree upon a new COVID relief \ stimulus package, President Trump signed an executive order on August 8, 2020 for an employee payroll tax deferral period. For employers, this is creating a fresh round of confusion and questions on their responsibilities. This program might sound compelling at first, but there are some big issues. Here are the top 7 things to know.

1 – Payroll Deferral, Not Holiday

The biggest thing to understand is this program to defer, not remove the employee payroll tax obligation from September 1, 2020 to December 31, 2020. Congress has to approve a payroll tax cut or holiday and the executive branch can just move collection dates.

What this means for employers is that the tax will be due after December 31, 2020 creating some complex situations if:

  • An employee leaves the company
  • Didn’t save that money and can’t do without a smaller paycheck.

2 – Eligibility

Only employees making up to $104,000 a year will be eligible to defer their payroll taxes.

3 – FICA Tax Refresher

The taxes in discussion are the FICA tax which fund social security and Medicare. For employees, this amounts to 6.2% of their paycheck.

4 – Potentially Forgiven

President Trump has stated that he would like to make these cuts permanent if he is reelected. Legal analysis is showing that he cannot make that decision by himself and will need Congress to support that. With the complete gridlock in Congress, the likelihood of this deferral turning into a cut is far from certain.

5 – Deferred Tax Obligation

To understand the implication of taxes due in January, here is some quick math:

  • For those paid monthly, they would owe an additional 24.8% of their January 2021 gross paycheck
  • For those paid semi-monthly, they would owe 49.6% of their first paycheck in January 2021

It isn’t clear how deferred taxes will need to be paid back, but this math may help employees understand the risk of kicking their taxes down the road.

6 – Payment Obligation

Where this program gets murky is who is obligated to submit the payroll taxes. Normally, the employer is obligated to reserve and remit FICA taxes at least quarterly. What isn’t clear is whether employer’s will be on the hook to remit the taxes or if it will hit the employee in their 2020 tax return.

7 – Optional Program?

Treasury Secretary Mnuchin has indicated that employers will have the option to decide to participate in this payroll tax deferral. Until the obligations of this program are sorted, have the option to not participate is wise.

Our Recommendation

We at LedgerGurus love a good tax cut as much as anyone but make no mistake this is not a tax cut. With the complexities of deferring collection, resuming collection, and most importantly the risk of employers being obligated to remit taxes, we would advise opting out at this point. You will want to double check on September 1 if opting out has been confirmed.

Should the obligation of payroll tax remittance be pushed to the employee via their 2020 tax return, opting into this program isn’t nearly as risky but employers will need to properly:

  • Assess employee eligibility
  • End payroll tax collection – this may be automated by payroll providers, but they don’t have much time to prepare
  • Resume payroll tax collection on January 1, 2021

Overall, this payroll tax deferral is a nice thought, but not great for employees or employers. The best option would be for Congress to come up with a less complicated program.

UPDATE

See this follow on article 2020 Employee Payroll Tax Deferral Program Guidance for additional insights and recommendations.