President Trump issued several executive orders to provide relief to Americans while Congress is gridlocked over the next stimulus package. In addition to orders that addressed unemployment benefits, eviction moratoriums and student loans, President Trump deferred payroll taxes from September 1, 2020 through December 31, 2020.
Payroll taxes refer to FICA taxes (Federal Insurance Contributions Act) withheld from employee’s wages. FICA has two parts – the Social Security tax and the Medicare tax. Social Security taxes only apply to wages paid up to the Social Security wage base, which is $137,700 for 2020. The Medicare tax applies to all wages paid without limitation.
Under the executive order, the withholding and payment of the employee’s share of the Social Security tax is deferred without penalties or interest. This deferral only applies to employees with bi-weekly, pre-tax income of less than $4,000, or a similar amount for different pay schedules/periods. The Treasury will issue further guidance on the implementation of the deferral. The executive order does not apply to the employee’s share of the Medicare tax, which will still need to be withheld and paid.
Many questions still remain, which should be cleared up when the Treasury issues further guidance. Most importantly, we don’t know how the deferred amount of taxes will be paid. The CARES Act, which applies to the employer’s share of FICA tax, allows the deferred amount of taxes to be paid over two years. We do not know if similar flexibility will be offered for the employee’s share of FICA taxes.
Another point of uncertainty is whether there is any legal requirement to stop withholding employee’s FICA taxes. Without guidance from the IRS, an employer could theoretically withhold the FICA tax amounts from their employee’s wages and not deposit and pay them to the IRS. There are also potential conflicts with state laws that require an employee’s written permission to withhold any non-required amount from their wages. There are also questions about how to manage employees changing jobs, as the employee is responsible for their own taxes.
If you are not sure how to take advantage of the deferral, or if you should participate at all, contact us today.