Although the Coronavirus Aid, Relief, and Economic Security (CARES) Act and other legislation was put into place to provide economic relief from the COVID-19 pandemic, there has yet to be any payroll tax cuts – a long requested by the White House but firmly refused by Congress members from both parties. After much back and forth between Democratic leadership and the White House, the dispute was not close to being settled, so President Trump issued four executive memorandums on Aug. 8, 2020. The most significant of these new memorandums is the deferral of payroll taxes from Sept. 1, 2020, through Dec. 31, 2020, intended to help rebuild the economy. Doeren Mayhew’s advisors further explore this new executive memorandum and how it may affect your business’s payroll taxes.

About the Executive Memorandum

The elimination of payroll taxes has been on the White House’s list of demands for months; the idea behind it is the reduction of FICA taxes, which will allow more wages for employees and in turn more spending opportunities for the suffering economy. According to President Trump’s “Memorandum on Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster”, the deferral is for the withholding, deposit and payment of the employee’s share of the 6.2% Social Security tax paid on wages during the Sept. 1, 2020, through Dec. 31, 2020 period. The memorandum does not mention the employee’s share of the 1.45% Medicare tax, which is still required to be withheld, deposited and paid within the deferral period.

Numerous Deferral Concerns

This new memorandum brings with it a number of resounding concerns. Companies that implement the deferral will require additional withholding for employees’ future wages, which will surprise employees expecting their normal pay. Unless the deferral is passed by Congress or signed into law, taxpayers who aren’t used to paying their own payroll taxes directly would be on the hook for making up the difference. When the executive memorandum expires in January 2021, the Internal Revenue Service (IRS) could go after both the employer and their employees if the taxes aren’t paid on time; in turn, some surprised taxpayers would need to go without a paycheck the first week or two in January to pay off the taxes.

Additionally, it’s unclear how employers should manage deferrals in the event of job changes. For example, if an employee changes jobs during the deferral period, is the debt automatically relieved? If this is the case, employees have reason to quit their jobs and seek new employment at the end of 2020, throwing a spanner in daily operations for many businesses across the country.

President Trump wants full relief for deferrals, but it is not guaranteed by Congress. Overall, the short-term gains of deferrals do not seem to outweigh the end-of-year burdens.

Questionable Implementation

Implementation for this new executive memorandum is also uncertain, but the Treasury has been ordered to issue guidance to answer questions on the deferral process. There is no set requirement to follow this new deferral, as employers have not yet been ordered to cease withholding, depositing and paying the employee’s share of the tax. This calls for guidance to be released from the IRS, otherwise employers could just continue to withhold amounts from employee wages and put aside the withheld amounts, meaning the economy wouldn’t receive the desired stimulating effect.

After the deferral expires on Dec. 31, 2020, employers will need to start paying the four months’ worth of payroll taxes beginning January 2021. This amount will be combined with the deferral of the employer’s FICA taxes under the CARES Act for Mar. 27, 2020, to Dec. 31, 2020. While the CARES Act offers employers two years to pay the deferred amounts, it is unclear if the payroll tax deferral will follow the same payment schedule.

More Guidance to Come

Since the tax cannot be eliminated without action from Congress and the deferral of payroll taxes will amount to a large payment from employers come January, it is questionable whether the deferral period will be successful. Doeren Mayhew’s advisors will keep you updated on any new guidance from the Treasury, IRS and Congress. If you have questions about how this new payroll deferral could impact your business, contact us today.