What's Going On with Payroll Tax Deferrals?

President Trump has signed an executive memo directing the Treasury department to implement a payroll tax deferral, in an effort to provide temporary tax relief to workers beginning September 1. However, as we wait for detailed information on this program, it may take much longer before the deferral is actually implemented.

Here’s what we know so far, and a preview of what kind of guidance we can expect to see.

What exactly is deferred?

The Social Security taxes that an employee must pay on their income can be deferred. This applies to income paid between September 1 and December 31, 2020.

For employers and self-employed individuals, Social Security taxes that an employer must pay are already deferred, thanks to the CARES Act.

Who can benefit from this tax deferral?

An employee who makes less than $4,000 before taxes on a biweekly basis (or its equivalent for all other pay periods - for example, $104,000 annually) can claim the tax deferral. They would not see the 6.2% Social Security tax applied on their paychecks over the four months, resulting in a larger-than-usual paycheck amount.

Does an employee need to repay the tax?

Yes, employees will need to repay the tax once the deferral period ends. That means employee paychecks will be smaller starting in 2021. The deferred tax needs to be repaid by April 30, 2021. Interest and penalties will begin to accrue starting May 1, 2021.

As an employer, how do I provide the deferral for my employee?

This is still unclear. Payroll providers are working on implementing this in their payroll system.

It is not known how the deferred tax will need to be repaid in 2021. It may be deducted from an employee’s paycheck (either in a lump sum or in installments), or the employee may be required to make the repayment on their own. Current IRS guidance asks employers to “make arrangements” to collect the deferred tax, but many employers find this too vague to make a decision without considering potential tax and compliance consequences.

Are bonuses, commission, or hazard pay included in the wage criteria?

The IRS clarified that wages are defined according to section 3121(a) of the Internal Revenue Code, and compensation is defined according to section 3231(e) of the Internal Revenue Code.

That means generally yes, bonuses, commission, hazard pay, and tips are all forms of compensation for services performed and should be included in the wage calculation.

What do I need to do now?

Until detailed guidelines are released, there’s nothing you need to do right now. Our research team will keep track of the latest developments and we’ll update this post to reflect the latest information on how this will affect you and your business.

Read our analysis of what other executive orders were made and their impact on you.

Read the guidance from the US Treasury Department released Friday, August 28th.

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This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein.

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