Benefits and Compensation, Coronavirus (COVID-19)

Payroll Tax Deferrals—What Should Employers Do?

Earlier this summer, President Donald Trump issued an Executive Order directing Secretary of the Treasury Steven Mnuchin to defer the withholding, deposit, and payment of certain payroll taxes beginning September 1 through the end of 2020. The order left several important questions open and directed the Treasury to issue guidance to implement the order.

payroll
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Secretary Mnuchin finally issued guidance on August 28, but many questions remain.

Questions Answered

Is the deferral mandatory? No. For several reasons, the president cannot force employers to defer the payment of payroll taxes that are otherwise owed under the tax code. Secretary Mnuchin has acknowledged neither the president nor Treasury has the authority to force deferral.

What payroll taxes are included? The order applies only to the employee portion of Social Security taxes associated with wages paid from September 1 through the end of 2020. Further, the order applies only to employees whose wages are less than $4,000 per biweekly pay period (or less than $104,000 annually).

Will the payroll taxes be forgiven entirely? It isn’t guaranteed the payroll taxes will be forgiven. The president’s order directs Treasury to explore avenues to forgive the deferred taxes, but it would take an act of Congress to forgive them. There’s no certainty Congress will choose to do so.

If the payroll taxes are deferred, how and when must they be paid? The deferred taxes must be paid by the employer by withholding additional amounts from employees’ paychecks issued from January 1, 2021, through April 30, 2021. In the simplest case, this would result in employers withholding an additional 6.2% from each employee’s paycheck for the first 4 months of 2021. Failure to repay the deferred amounts by April 30, 2021, will result in penalties and interest for the employer.

If a current employee leaves or is terminated at the end of 2020, who pays the taxes? The guidance indicates an employer may “make arrangements to otherwise collect” the deferred payroll taxes from a departed employee. It isn’t hard to imagine instances in which it would be difficult to make such an arrangement, and in that case, the employer is on the hook for the full amount of the deferred payroll taxes.

Big Picture

The guidance left many unanswered questions, particularly regarding the logistics of how to implement the payroll deferral and how to repay the deferred taxes in the event they aren’t forgiven by Congress. If you have questions about whether your company should defer the taxes or how to go about implementing the deferral, please contact your attorney.

Michael A. Gilmer and Jo Ellen Whitney are attorneys with Davis Brown Law Firm in Des Moines, Iowa. You can reach them at michaelgilmer@davisbrownlaw.com or joellenwhitney@davisbrownlaw.com.