Unless Congress acts on additional legislation that clarifies this deferral, the deferred taxes may have to be repaid. Further, congressional democrats have indicated a forthcoming court challenge to President Trump's actions.
Memorandum on Deferring Payroll Tax: the details
The memorandum lays out the following details, though there are myriad questions regarding how these will be implemented, reporting ramifications, and discrepancies between the actual order and accompanying information. At this time, here is what we know:
The memorandum states that the deferral applies only to employees whose earnings during any biweekly pay period is generally less than $4,000, calculated on a pretax basis (i.e. salaried employees earning $104,000 or less per year). However, there are discrepancies in these amounts between the actual order and the accompanying press release.
Social Security taxes for these employees will be deferred without any penalties, interest, additional amount or addition to the tax.
Employers would need to exclude the employee share of FICA social security tax beginning September 1, 2020.
Employers would need to communicate to employees that while their take-home pay may go up in the short term, they may be required to repay these deferred taxes at a future date depending on further guidance or legislation.
But the most important takeaway is this: Employers should await further guidance before taking concrete action on the deferral, and will need to carefully monitor developments relating to this memorandum.
"At this point, employers should take a cautious approach to this order and wait for guidance from the IRS and legislative changes or updates. CheckWriters is awaiting guidance before taking any action on behalf of our clients, because there are simply too many unknowns," says Jill Grasso, Tax Manager at CheckWriters.
Specifically, CheckWriters is awaiting forthcoming guidance to address a number of issues and employer questions. For example:
1. Can employees and/or employers opt out of this deferral? 2. How will the deferral be tracked? 3. What will the IRS reporting requirements look like? 4. What are the specific parameters of the salary threshold? 5. How will the taxes be paid in 2021? 6. Will the employee be debited in 2021? 7. What if the employee leaves the organization – who eventually pays the tax?
"Employers absolutely need answers and clarification before taking any action on this deferral," says Grasso. "Our Tax Department is maintaining close contact with federal agencies as well as industry groups, and will be sure to keep employers and payroll professionals abreast of developments on this issue."