Deferring Employee Payroll Taxes: What You Need to Know

What Trump’s executive order on payroll taxes means for employees and employers

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Editor’s note: This article was updated on September 21, 2020 to include the following details from Zenefits

Zenefits does not currently intend to implement technology changes to allow for an employee level tax deferral of Social Security withholdings.  Based on guidance from the IRS, employers are not required to accommodate this deferral.  We will continue to remain aware of up-to-date guidance regarding COVID-19 legislation and act accordingly to support our customers.  The full text of IRS Notice 2020-65 outlining IRS guidance on this tax deferral can be found here.

Original article: 

On August 8, 2020, President Donald Trump issued an executive order deferring certain payroll tax obligations in light of the COVID-19 crisis. According to Trump, the executive order “will put money directly in the pockets of American workers and generate additional incentives for work and employment, right when the money is needed most.”

What the executive order means for employees and employers

Titled “Memorandum on Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster,” the executive order is a directive from President Trump to the Secretary of the Treasury.

Per the memo, the secretary must use his authority to defer the withholding, deposit, and payment of employees’ share of Social Security tax on wages earned between September 1, 2020 and December 31, 2020.

The deferral applies to employees who receive less than $4,000 (pretax) biweekly, or the equivalent amount for other payroll periods (for example,. weekly or semimonthly.) This means that employees earning less than $104,000 for the year are eligible for the deferral.

(Calculation: $4,000 x 26 biweekly pay periods = $104,000.)

Important to know: 

  • The memo/executive order directs the secretary to “explore avenues, including legislation, to eliminate the obligation to pay the taxes deferred,” but it does not forgive or waive the deferred tax. So, if these “avenues” are not enacted, employees will have to pay their deferred Social Security tax in the future.
  • The deferral will not affect employees whose 2020 wages have already exceeded the Social Security wage limit for 2020 — which is $137,700.
  • The memo applies only to the employees’ share of Social Security tax. It does not cover employees’ share of other taxes — including federal income tax, Medicare tax, and applicable state and local payroll taxes.
  • The memo does not apply to employers’ share of Social Security tax. However, under the CARES Act, eligible employers can defer their share of Social Security tax that would otherwise be owed from March 27, 2020 to Dec. 31, 2020. Note that the CARES Act does not allow employees to defer their portion of Social Security tax, and Trump’s executive order is their chance to do so.
  • Social Security taxes deferred under Trump’s order are not subject to “penalties, interest, additional amount, or addition to the tax.”
  • Although the executive order lists the deferral start date as Sept. 1, 2020, media reports say that it could be retroactive to August 1.

With the start date just around the corner, now is a good time for employers to understand their payroll tax responsibilities.

Overview of payroll taxes

Payroll taxes refer to Social Security tax and Medicare tax, whose collections are authorized by the Federal Insurance Contributions Act (FICA).

FICA consists of 2 parts:

  1. Social Security or Old Age Survivors, and Disability Insurance (OASDI), which enables payment of Social Security benefits to eligible individuals. Employers, employees, and self-employed people must pay OASDI tax (also called “Social Security tax”), which is used to fund the Social Security system.
  2. Hospital insurance, which provides Medicare coverage to senior citizens and the disabled. Employers, employees, and self-employed people must pay Medicare tax, which is used to fund the Medicare system.

The federal government annually sets the Social Security tax and Medicare tax amounts that employers, employees, and self-employed people must pay each year.

FICA Tax Rates For 2020

wdt_ID Taxpayer Social Security Tax Medicare Tax
2 Employee 6.2% of taxable wages, up to $137,700 1.45% of all taxable wages
3 Employer 6.2% of taxable wages paid to each employee, up to $137,700 1.45% of all taxable wages paid to each employee
4 Self-employed 12.4%, up to $137,700 of net earnings 2.9% of all net earnings

There’s also an additional Medicare tax of 0.9% on employee wages over $200,000. Employers are not required to pay additional Medicare tax, only the high-income earner.

As a small employer, you must withhold not just FICA taxes from your employees’ wages but also federal income tax and applicable state and local employment taxes. You must also remit the Social Security tax, Medicare tax, and federal income tax withheld from your employees’ wages plus your own share of Social Security and Medicare taxes, together, to the Internal Revenue Service (IRS). Employers must deposit these taxes on either a semi-weekly or monthly basis. Your specific deposit schedule depends on IRS guidelines.

With Trump’s executive order now in play, you may be able to temporarily stop withholding (and depositing) your employees’ portion of Social Security tax owed on wages paid between September. 1, 2020 and December 31, 2020. However, questions loom over the deferral.

What employers want to know

The executive order is skimpy on the details, leaving employers with the following questions:

  • Is the deferral mandatory or voluntary for employers? Meaning, are employers legally required to suspend withholding and depositing of employees’ Social Security tax? Or, can they choose to keep withholding and remitting the tax as normal?
  • Should employers withhold the entire deferred amount from the employee’s first paycheck in January 2021? Or, can they spread out the payments, like installments, over time?
  • When would employers need to deposit withholding for deferred taxes to the IRS?
  • What if an employee leaves the company before January 1, 2021? Should the employer withhold the terminated employee’s deferred tax from their final paycheck? Or, can the terminated employee instead pay the deferred tax when they file their federal tax return?
  • What happens if withholding for the deferred amount causes the employee’s wages to fall below the required minimum wage?
  • Can employers opt to defer Social Security tax for certain groups of employees while disqualifying others?
  • What wages count toward the $4,000 threshold? For example, can bonuses, commissions, and overtime pay be included?
  • What are the Form W-2 requirements for the deferred tax?

Next steps for small employers

With so many questions and so few answers available, you may be wondering where to go from here. First, you should know that additional guidance from the Secretary of the Treasury is forthcoming.

Meanwhile, small employers should:

  • Prepare to inform their employees that their wages might not be subject to Social Security tax withholding between September. 1, 2020 and December 31, 2020 and that deferred amounts may need to be paid later. When the time comes, make sure your communication is precise to avoid employees misinterpreting the deferral terms.
  • Be ready for questions your employees might have about how the deferral will impact their paychecks. They may also want to know what constitutes pretax wages.
  • Work closely with your payroll, HR, finance, and legal teams to determine how the deferral may affect your payroll function and related operations.

It’s going to be challenging for many employers and payroll service providers to update their payroll systems and implement all changes by September 1, 2020. For this reason, small businesses and payroll service providers should start planning from now.

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