Treasury Issues Guidance on Payroll Tax Deferral Executive Memorandum
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Last Updated: 08/29/2020
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Please note that we are actively monitoring evolving legislation and will continue to provide information as it becomes available. While we are moving swiftly to analyze and share these updates with our customers and the general public in real-time, some aspects of this article may be dated as updates continue to be announced. For more information on the stimulus plan signed into law on December 27, 2020, read our article on the Relief Act. To learn more about financial relief opportunities under the new law, read our article on extended relief with unemployment benefits.
Deferring Payroll Tax Obligations
President Trump, interceding when Congress did not come to an agreement on a stimulus bill, signed one executive order and three memoranda on Aug. 8, 2020 aimed at providing financial assistance and relief to Americans amid the ongoing COVID-19 pandemic.
On Aug. 28, the IRS issued Notice 2020-65 to provide guidance on how to implement the Executive Memorandum on payroll tax deferral. Any additional clarification needed for this executive memorandum or the others will have to come from future guidance. The subjects of the executive order and memoranda are:
- Deferral of payroll tax obligations (memorandum)
- Extension of unemployment insurance benefits (memorandum)
- Extension of student loan payment deferral period (memorandum)
- Eviction filings and late fees (executive order)
This memorandum instructs the Secretary of the Treasury to defer the withholding, deposit, and payment of the tax imposed on the employee portion of the Social Security tax of 6.2%.
The following is a summary of what is known about the first two memoranda listed above as of the publication date.
FAQs on Payroll Tax Deferral Guidance
Am I eligible to defer social security tax for my employees?
Employers who are required to withhold and pay the employee share of Social Security tax under section 3102(a) are affected by the COVID-19 emergency for purposes of the relief described in the Presidential Memorandum.
When are deferred taxes due?
The due date for the withholding and payment of the employee share of Social Security tax on Applicable Wages is postponed until the period beginning on Jan. 1, 2021 and ending on April 30, 2021.
What are Applicable Wages?
Applicable Wages are wages or compensation paid to an employee on a pay date during the period beginning on Sept. 1, 2020 and ending on Dec. 31, 2020 but only if the amount of the wages or compensation is less than a defined threshold amount for each pay period.
How are Applicable Wages determined?
The determination of Applicable Wages is made on a pay period-by-pay period basis. If the amount of wages or compensation payable to an employee for a pay period is less than the corresponding pay period threshold amount, then that amount is considered Applicable Wages for the pay period. The employer then may defer the employee share of social security tax on the Applicable Wages, irrespective of the amount of wages or compensation paid to the employee for other pay periods.
What are the threshold amounts for common pay periods?
- Bi-weekly pay period: Less than $4,000
- Weekly pay period threshold amount: $2,000 ($2,000 x 52 weeks = $104,000.00)
- Semi-monthly pay period threshold amount: $4,333.33 [$4,333.33 x 24 (2 pay periods/month) = $103,999.92]
- Monthly threshold amounts: $8,666.66 ($8,666.66 x 12 months = $103,999.92)
Note: These assumptions are based upon the original $104,000 annual limit put forth in the President’s Executive Memorandum. This is also assuming 26 check dates, for a bi-weekly schedule. ($4,000 x 26 = $104,000). The guidance does not specifically indicate any threshold amount other than the bi-weekly amount.
Who is responsible to pay the deferred taxes?
An employer remains responsible to collect and remit any deferred taxes. An employer must withhold and pay the total taxes due that the employer deferred under this notice ratably from wages and compensation paid between Jan. 1, 2021 and April 30, 2021 or interest, penalties, and additions to tax will begin to accrue on May 1, 2021, with respect to any unpaid taxes. If necessary, the employer may make arrangements to otherwise collect the total taxes from the employee.
Keep in mind that this is a deferral and nothing in the memorandum explicitly forgives this amount nor can it without an act of Congress. It does specifically state that amounts deferred will not be subject to penalties, interest, additional amounts, or additional tax.
Employers, meanwhile, have had the ability to defer payment of the employer share of the Social Security tax (6.2%) paid since the passage of the CARES Act in April. The law allows such payments over a two-year period – with half due by Dec. 31, 2021 and the other half due by Dec. 31, 2022.
Employers may be facing the brunt of any implementation because of the complexity created on calculating and tracking such tax deferrals. Plus, the process itself of creating new regulations is wrought with layers of complexity, including rules that might change as the process progresses from drafting proposed regulations to taking public comments to issuing finalized regulations. If shifts occur, employers will need to be nimble and stay up to date on any changes to current law.
The IRS has released a draft Form 941 to reconcile this deferral, but this could be revised before the final version. Additionally, we await instructions for the form to understand how the specifics work.
Expanding Unemployment Insurance Benefits
The Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed in April 2020, implemented a provision that provided eligible individuals who are collecting Unemployment Compensation with an additional $600 per week in benefits.
The intent was to provide an extra financial boost to those who became unemployed as a result of business closures created by COVID-19.
The benefit expired July 31, 2020.
However, with many businesses in flux – some opening but at reduced capacity and with smaller staffs, others remaining closed, and still some that re-opened and then closed again by state order amid spikes in coronavirus cases – discussions were held to extend the benefit.
The executive order from the president extended the weekly supplemental benefit but at a reduced rate of $400 per week.
The memorandum states that the federal government will fund $300 of the amount until funds are exhausted, leaving states to pick up one-quarter of the benefit per individual (or $100). The federal money allocated is $44 billion from the Disaster Relief Fund, managed by the Federal Emergency Management Agency (FEMA), and once depleted, the memorandum indicates that states may have to fund the full amount. However, many states are currently short on funds.
Paychex is waiting for guidance from the U.S. Department of Labor on how this would be implemented because additional details have not yet been released.
This might be subject to lawsuits, but at this time it is unknown what those would look like.
Paychex will continue to monitor this dynamic situation and provide information as more details become available that could assist the business community.
This article was originally published Aug. 11, 2020.