On August 8, 2020, President Trump sent a memorandum to the U.S. Treasury Department, directing the Secretary of the Treasury to defer the withholding, deposit, and payment of the employee portion of Social Security taxes due from Sep. 1 through Dec. 31, 2020 until the first quarter of 2021, for employees whose pre-tax wages are less than $4,000 during a bi-weekly pay period, including those salaried employees earning less than $104,000 per year. The memorandum also directed the Treasury Secretary to “explore avenues, including legislation, to eliminate the obligation to pay” the deferred taxes.
That means that organizations and companies that choose to take this payroll tax deferral would then withhold additional amounts from those affected employees’ paychecks from January 1, 2021 through April 30, 2021 to repay that deferred tax obligation. The payroll tax deferral would not excuse the requirement of payment of such taxes. Additionally, the deferral is not retroactive meaning that an employer may only defer payment of taxes prospectively through December 31, 2020 (it may not include deferral of taxes or reimbursement of taxes to employees that were already withheld starting September 1).
There remain questions about the legality of President Trump’s memorandum in the absence of approval from Congress which constitutionally holds the power over the federal “purse strings”— to tax and spend public money for the national government. Although the Internal Revenue Service (IRS) issued guidance on August 28, 2020 (Notice 2020-65), employers are still awaiting further IRS guidance regarding how the deferral would be implemented, including whether (or how) an employee’s obligation to pay those deferred taxes or an employer’s obligation to withhold will be forgiven in the absence of Congressional approval, written confirmation that the choice of whether to implement deferrals rests with the employer, not the employee, and employer obligations with respect to such taxes if an employee is no longer employed with that employer at the time that repayment is due.
The payroll tax deferral is simply a deferral, not a forgiveness of taxes. If an employer does not pay the deferred payroll tax to the IRS by April 30, 2021, it could potentially be liable for penalties, interest and late fees.
Organizations should confer with their legal counsel and accountant before deciding to defer payroll tax withholding and to discuss structuring any agreements with affected employees concerning repayment if those organizations do decide to defer payroll tax withholdings.