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More Guidance Needed for the New Payroll Tax Deferral Scheme

As the congressional stalemate over another economic stimulus package continues, President Trump signed an executive order on August 8 deferring payroll tax obligations of employees, along with several other memorandums. But what does it really mean?

Aug 13th 2020
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Like many other controversial issues in our nation’s capital, the outcome is far from clear, while the benefits are being debated along political lines.

Under the executive order, employees would not be required to pay their share of the 6.2 percent Social Security tax that normally applies to an annual wage base ($137,700 for 2020). The grace period would last from September 1 through the end of the year. The deferral is generally available to an employee earning $4,000 every two weeks, which works out to $104,000 for the year.

But keep in mind that this is only a deferral—not a complete waiver—although the Treasury Department has been instructed to look into forgiveness of the amounts. And employers may choose to continue to withhold the payroll taxes from paychecks.

Finally, the executive order likely will be challenged as exceeding the president’s authority on constitutional grounds. The bottom line is that many tax practitioners and employers are perplexed about what should or should not be done. In response to the president’s memorandum, the American Institute of CPAs (AICPA) has submitted a letter to Treasury and the Internal Revenue Service (IRS), requesting additional guidance and clarification and providing recommendations.

Specifically, the AICPA has requested:

  • Guidance stating that the deferral is voluntary and that an “eligible employee” is responsible for making an affirmative election to defer the payroll taxes.
  • Guidance stating that an “eligible employee” is an employee whose wages are less than $4,000 per bi-weekly pay period.
  • Guidance stating that the $4,000 limit should apply separately to each employer of an employee.
  • Guidance stating a payment due date(s) for the deferred taxes and a mechanism for employees to pay the deferred taxes.

Subsequent to the AICPA letter, U.S. Treasury Secretary Steven Mnuchin indicated that the payroll tax deferral would not be mandatory for employers to implement. The AICPA had its own response.

“Since the taxes being discussed are those ‘imposed on the income of each employee,’ a big question we have is whether or not employees will have the option to opt in or out of the program,” said AICPA Vice President of Taxation, Edward Karl, CPA, CGMA, in a press release. “Employees should make the deferral decision and should also be responsible for repayment, however, there are certain questions that need to be considered that taxpayers and businesses need guidance on. For example, what if an employee works more than one job? What if the company goes out of business? What if the employee changes jobs? Employers still have to figure out how to implement this policy, but right now, there are too many unknowns.”

Note that the economic stimulus program initially passed in March as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act authorized a Social Security tax deferral for employers for the rest of 2020. Under the CARES Act, an employer can pay back 50 percent of the amount due by the end of 2021 and the remaining 50 percent by the end of 2022.

Hopefully, we will have more clarity soon about the issues relating to the payroll tax deferral order, and its legality, shortly. Stay tuned.

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