On Saturday, the President issued an executive order to defer the withholding, deposit, and payment of certain payroll taxes paid from September 1st through December 31, 2020, although the President indicated that it could end up being applied retroactive to August 1st.
The deferral applies to any employee whose pretax wages or compensation during any bi-weekly pay period is less than $4,000. The tax payments are deferred without any penalties, interest, additional amount, or addition to the tax.
The deferral applies to the employee’s portion of Social Security and Medicare taxes (a combined rate of 7.65%). (The deferral also applies to Railroad Retirement Act Tier 1 tax).
The IRS has the authority under the Internal Revenue Code to delay tax payments for up to a year during a presidentially declared disaster. The president declared the coronavirus pandemic a national emergency on March 13th.
Guidance on implementing the order and to ultimately eliminate the obligation to pay the deferred taxes is expected in the near future. That said, while the president has authority to delay the collection of taxes, only an act of Congress can eliminate them altogether.
While the deferral on collecting these taxes should result in bigger paychecks, if and when employees see a boost in their take home pay remains to be seen. First, because the relief is only a temporary deferral, employees, or their employers as their withholding agent, will have repay the deferred taxes next year. Second, many payroll companies will find it challenging to make programing changes to their payroll systems by September 1st. Finally, because the taxes are not forgiven, employers and payroll companies need guidance and further assurances from the IRS, that they will not have to foot the bill for their employees deferred taxes. As a result, it is possible that some employers will continue to withhold payroll taxes from there employee paychecks to minimize the risk both to themselves and their workers.
All of this means that over next few weeks, employers will need to explain to their employees why their take-home pay is or is not going up, and how that could be possibly reversed next year.
Stay tuned for further updates as new information emerges.
We have created a response team to the rapidly changing COVID-19 situation and the law and guidance that follows, so we will continue to post any new developments. You can view our COVID-19 Response Page and additional resources by following the link here. In the meantime, if you have any questions, please contact your Fraser Trebilcock attorney.
Fraser Trebilcock attorney Paul V. McCord has more than 20 years of tax litigation experience, including serving as a clerk on the U.S. Tax Court and as a judge of the Michigan Tax Tribunal. Paul has represented clients before the IRS, Michigan Department of Treasury, other state revenue departments and local units of government. He can be contacted at 517.377.0861 or firstname.lastname@example.org.