On August 8, President Trump issued an Executive Order for a payroll tax holiday for employees earning less than $100,000 per year. He directed the Treasury Department to issue guidance allowing employers to defer the 6.2% social security portion of employee payroll taxes for employees whose bi-weekly compensation during any payroll period from September 1 to December 31 is less than $4,000 (figured on each payroll period individually). The deferred taxes are paid ratably from January 1 through April 30, 2021.
While the long-awaited guidance was issued late Friday in IRS Notice 2020-65, many questions remain unanswered.
Employers must now decide whether to implement the deferral for their employees.
Basically, for each employee for each pay period, the employer must determine if the employee’s wages meet the criteria for payroll tax deferral. Employees may be eligible one payroll period and not eligible the next. Amounts deferred for each employee must be tracked so that they may be withheld and paid in 2021.
While employees get an increase in their paychecks now, they will have twice as much withheld the first four months of next year.
It is unclear whether this is mandatory or voluntary on the part of the employer. It is also unclear whether employees could choose to continue having taxes withheld so they will not have to pay double next year. The most troubling issue not addressed is what happens if the employee leaves before the taxes can be withheld next year. The IRS says the employer may “make arrangements to otherwise collect the … taxes from the employee” but does not clarify what this means. This statement doesn’t seem to relieve the employers liability to pay the taxes in.
Even though this is effective September 1, many software companies have not had time to incorporate the new rules into their payroll systems, QuickBooks among them.
Your employees may be aware of this and may be asking about it. Based on what we are reading and hearing, many employers are waiting for further guidance before implementing.
We are available to answer your questions as you evaluate when or whether to implement these changes.
McDaniel & Company PLLC
