Dear Clients,
On August 8, 2020, President Trump issued a Presidential Memorandum to the Department of Treasury to allow for the deferral of the employee’s share of Social Security tax for the period of September 1, 2020, through December 31, 2020.
The deferral only applies to the OASDI portion of Social Security taxes. It does not apply to Medicare tax withholding. $4,000 per bi-weekly pay period. The deferral is restricted to “any employee the amount of whose wages or compensation, as applicable, payable during any bi-weekly pay period generally is less than $4,000, calculated on a pre-tax basis, or the equivalent amount concerning other pay periods.”
Notice 2020-65 that the deferral applies to wages or compensation paid to the employee for the pay period, irrespective of the amount of wages or compensation paid to the employee for other pay periods.
Tax Planning. The maximum deferral is $2,149 ($8,666 x 4 months x .062). A $20 per hour employee would have a four-month deferral of about $800.
Deferred Not Forgiven. Notice 2020-65 states that the employer “must withhold and pay” the total deferred tax amount ratably from wages and compensation paid between January 1, 2021, and April 30, 2021. There is no information in the Notice on what the employer is to do if the employee no longer works at the business or if the business is permanently closed.
Three Major Concerns.
Is the repayment ultimately the employer’s obligation?
How will the deferral be reported on Form 941?
Is the deferral optional? In a Fox News interview on August 12, 2020, the Treasury Secretary Mnuchin said, “We can’t force people to participate, but I think many small businesses will do this and pass on the benefits.”
I want to fill in the blanks, answering: Just what is the new payroll tax deferral, and who does it help? Let's start by clarifying a few things:
● Payroll tax relief only applies to those with a biweekly pre-tax paycheck of
less than $4,000.
● The deferral only applies to those on a payroll. The relief won't aid millions
of those unemployed or furloughed due to COVID-19.
● The relief only addresses the employee's 6.2% share of Social Security
taxes, not the 1.45% Medicare taxes.
● The employee is expected to repay the deferred payroll tax through ratable
payroll withholding between January 1, 2021, and April 30, 2021.
- Trump's executive orders call for a payroll tax deferral from Sep. 1 – Dec. 31, 2020
- The Order suspends the collection of 6.2% Social Security tax through Dec. 31, but
this is a deferral, not a forgiveness
- Relief only applies to those with a biweekly pre-tax income of less than $4,000
- Unemployed or furloughed receive no benefit
Basically, from September 1 -
December 31, employees won't have to pay their 6.2% Social Security earnings. Although
in theory, this makes workers 6.2% better off, we will be expected to pay this back into
the government's coffers over the first four months of 2021.
The Effects of the Election
A further thing to consider is the upcoming election. Should President Trump win a
second term, he has said his administration would work toward forgiveness of the deferred
payroll tax and ask Congress for appropriate legislation.
I hope this answers some of your questions. If not, give us a call, and we can help.
Warm Regards,
Diane Shenk, EA
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