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How Trump’s Payroll Tax Deferral Affects Employers
On August 8, 2020, President Trump signed three memoranda and one executive order related to the COVID-19 pandemic. This action came after Congress was unable to reach an agreement on the next stimulus bill.
There are many questions about what these executive actions mean, as well as how they will be implemented. The White House says these directives are meant to extend economic relief to unemployed and employed Americans during the recession. However, the logistics and timeframes of these orders remain unclear.
While we wait for more information and guidelines to be released, let’s discuss what these executive actions mean. We’ll focus on how the payroll tax deferral affects employees and employers. We’ll also discuss how employers can prepare for any upcoming changes.
IRS Issues Guidance on Payroll Tax Deferral
On August 28, 2020, the IRS issued guidelines for employers about the payroll tax deferral. Notice 2020-65 outlines the following:
- Any payroll tax deferred would need to be paid back by April 21, 2021
- Employers who choose to implement would be responsible for deferring the taxes beginning September 1, 2020, if they choose to participate
- Employers would also be responsible for deducting the necessary amount to be paid back by April 21, 2021
With the guidelines being released so close to the September 1 date, employers have little time to decide. Furthermore, businesses that choose to implement the deferral will need to communicate with their employees about the impending changes to their paychecks. Workers will see a bump beginning in September. However, they will also see lower than usual income from January to April during the payback period.
The guidance doesn’t answer all questions around the payroll tax deferral, particularly what employers should do if an employee quits during the deferral period. We’ll continue to update this article as more information is released.
If you’re an APS customer, please visit our Help Center article about the payroll tax deferral for more information.
Payroll Tax Deferral for Employees
What Does The Memorandum Do?
The memorandum for payroll tax deferral issued by the president suspends employees’ payment of Social Security Taxes from September 1, 2020, to December 31, 2020.
There is some gray area within this executive order. The memorandum implies the taxes will have to be paid back, but there is no timeline offered for when the repayments will occur.
What Does A Payroll Tax Deferral Mean?
A payroll tax deferral means employee paychecks aren’t reduced by taxes like Social Security and/or Medicare. In the case of the current memorandum, employees’ paycheck contributions to Social Security are temporarily halted. Your employees might receive more money in their paychecks starting this fall, but that money may need to be paid back next year.
There are various views on tax deferrals as they usually benefit some individuals while putting limitations on others. Trump’s payroll tax memorandum is intended to provide more immediate relief to American workers. However, it also directly impacts the Social Security fund, which gives individuals a source of income after the age of 62.
Who is Eligible for the Payroll Tax Deferral?
American workers who earn less than $4,000 before taxes for any bi-weekly pay period would be eligible for a payroll tax suspension. In other words, an employee must earn less than $104,000 per year to qualify.
When Will the Payroll Tax Deferral Go Into Effect?
According to the memorandum, the payroll tax holiday would be in effect September 1, 2020, through December 31, 2020.
How Much Would an Employee Save With the Payroll Tax Deferral?
Traditionally, 7.65% of an employee’s wages are deducted from a paycheck each pay period to fund Social Security and Medicare (6.2% for Social Security; 1.45% for Medicare). Employers pay an equivalent amount of tax. For 2020, the Social Security tax only applies to the first $137,700 of earnings. An additional 0.9% Medicare tax is collected on wages over $200,000 for the year.
Under Trump’s directive, the 6.2% share of Social Security for ordinary payroll taxes won’t be deducted from paychecks if a worker’s bi-weekly salary is $4,000 or less.
A full-time worker earning $15 per hour would get $37 more per week or $149 more per month. From September through December, that will add up to $670.
Will the Deferred Payroll Taxes Need to be Repaid?
According to the memorandum, the deferred amounts will not be assessed any penalties, interest, additional amount, or addition to the tax. However, employers may not have to comply with the order and the deferred taxes may have to be paid later.
How Does the Payroll Tax Deferral Impact Employers?
If this memorandum is implemented, it could mean that employers will have to adjust payroll tax rates in the middle of the year. For businesses using outdated or disparate systems, a change of this magnitude could be difficult to implement. Especially with open enrollment season and year-end processing on the horizon.
How Can Employers Prepare for the Payroll Tax Deferral?
Once guidance is released from the Treasury Department, businesses can make more informed decisions with their employees. The executive action states the Secretary of the Treasury “shall issue guidance to implement this memorandum,” and “explore avenues, including legislation, to eliminate the obligation to pay the taxes deferred…”.
For now, HR and payroll managers should:
- Consider the steps needed to adjust their payroll systems for the Social Security tax deferral beginning September 1, pending the issuance of Treasury guidance.
- Prepare to notify employees that potentially less of their pay will be subject to payroll withholding. However, the reduction in payroll taxes may have to be repaid in the future.
- Expect to field questions from employees about current and future paycheck adjustments.
If you receive questions from employees about the payroll tax deferral, let them know you are waiting for further guidance to be released and will update them when more information is available.
The Disaster Relief Memorandum
Issued to the Secretary of Labor, the Secretary of Homeland Security, and the Administrator of the Federal Emergency Management Agency (FEMA), the memorandum would provide $400 financial relief per week to Americans unemployed due to the effects of COVID-19. The federal government would supply 75% of funding, with states to compensate the remaining 25% of funding. To qualify, individuals must meet two criteria:
- An individual must receive at least $100 per week in regular state unemployment compensation assistance.
- An individual must certify that his or her lost wages are attributed to disruptions caused by COVID-19.
The Education Memorandum
Issued to the Secretary of Education, this memorandum moves to extend student loan payment relief to Americans with government-funded student loans through December 31, 2020. Currently, student loan payment deferments and 0% interest rates on federal student loans are set to expire on September 30, 2020.
The Housing Executive Order
This order aims to minimize residential evictions and foreclosures for homeowners, renters, and landlords who are experiencing financial hardship due to the effects of COVID-19. The Director of the Federal Housing Finance Agency (FHFA), the Secretary of the Treasury, and the Secretary of Housing and Urban Development (HUD Secretary) have been given direction to identify federal funds, as well as review existing authorities and resources. They will use their findings to provide necessary financial assistance to homeowners, renters, and landlords.
How APS Can Help
APS has been providing payroll and tax compliance services to businesses across the country since 1996. Our tax compliance experts can assist you with W-2s, 1099s, payroll taxes, FFCRA, and ACA reporting. We have a negligible tax fee ratio of 0.000001% per $700 million in payroll tax payments processed.
Since March, we have been a source of COVID-19 resources for businesses of all sizes. As COVID-19 legislation has passed, our in-house development team has also made adjustments to our all-in-one payroll and HR platform to help businesses manage compliance. To learn more about how we can help you make payroll easier, click here.
Please Note: This article should not be used as tax advice. Tax rules vary by location and change periodically, so please consult a CPA or tax advisor for guidance.
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