The President’s Executive Order on Payroll Tax Deferment – What You Need to Know|
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President Trump signed a series of Executive Orders on Saturday, August 8, 2020, that extended new relief to Americans impacted by COVID-19, including new unemployment bonuses and a payroll tax deferral. These Executive Orders ignited a flurry of debate on the legality and practicality of enforcing the new measures, as well as significant uncertainty regarding the future impact on both employers and employees.
On August 28, 2020, the IRS aimed to dispel some of the uncertainties surrounding the payroll tax deferral through Notice 2020-65. The President’s original memorandum offered few details on the implementation of the deferral, nor did it address any specifics related to forgiveness or the burden to repay the deferred taxes, but this new Notice begins to provide some clarity on the deferral, including information on repayment.
What are the Facts of the Executive Order?
- Employees with an annual salary of $104,000 or less will be eligible for the payroll tax deferral. The memorandum specifies that employees making $4,000 or less (pre-tax) in wages or compensation for a bi-weekly pay period will be eligible.
- The Secretary of the Treasury is responsible for providing further details on the implementation of the memorandum. If this Executive Order withstands legal challenges, the Treasury will be responsible for defining rules around tax forgiveness and further implementation.
- The deferral option will be available from September 1, 2020, until December 31, 2020.
What Guidance has the IRS Provided?
- The payroll tax relief provided by the Executive Order is a deferral, not a tax holiday, and must be repaid. The employer holds the burden of repaying the deferred taxes, likely through increased tax withholdings following the 4-month relief period of September 1, 2020, through December 31, 2020.
- The deferred amount must be repaid by April 30, 2021. Employers can collect the deferred taxes ratably from employee wages between January 1, 2021, and April 31, 2021, in addition to the normal payroll taxes on those wages.
- Employers will be subject to interest and penalties for unpaid payroll taxes on May 1, 2021.
What Questions Remain?
- What will this tax deferral look like for employers? The latest guidance suggests that employers will be able to decide whether or not they participate in the deferral program, but it is still unclear whether employers will have to provide each employee with the individual choice to participate. Further, it is unclear what options are available to employers during repayment for employees that have been terminated or furloughed. The Notice suggests that employers may have to make alternative arrangements to collect the deferred tax amounts but provides no further specifics. Uncertainty also persists for payroll companies’ ability to adjust their systems and processes quickly enough to support such a drastic new tax option.
- How will this impact employees? Now that it is clear that the employer holds the burden of repayment, the biggest uncertainty for employees is their individual power to opt-in or out of the program, and the possible ramifications of that choice given the unknowns about possible forgiveness. Employees will also need to know more about the eligibility requirements to elect the deferral. The Notice explains that the eligibility for each employee will be determined on a pay-period-by-pay-period basis, so unique circumstances involving raises, bonuses, or commissions could disqualify some individual employees for one or more pay periods.
- Will forgiveness be an option? The Notice from the IRS clearly states the terms of repayment, but it does not address the possibility of forgiveness mentioned by the Executive Order. Without further details on whether forgiveness will be available, many questions persist related to the impact forgiveness could have on those participating in the program, including employers and employees. For instance, if the employee opts out or if the employer chooses not to participate in the deferral program, will the effected employees be excluded from any possible future forgiveness of the deferred tax amounts?
- If you take advantage of this deferral, we recommend you consider the possible repayment obligations, barring further guidance on possible forgiveness. You should consider the quick timeframe for repayment during 2021 to the government while planning your personal cash flow.
- If you decided not to take advantage of this interest-free loan, and the government decides to make this amount forgivable, it would be unknown if you would then be able to opt into the program. Due to these uncertainties, each qualified person may be incentivized to take advantage of this deferral at the beginning, especially considering it may become permanent. However, these decisions are dependent on whether your employer and their payroll company offer the deferral.
- Notice 2020-65 does not address any impact on self-employed persons. While this may be addressed in future notices, we do not recommend any reduction in Q3 or Q4 estimated tax payments for self-employed persons.
As Congress seems no closer to reaching a deal on the next round of economic relief, the President’s intervention provides a possible lifeline for individuals continuing to feel the impact of the pandemic. However, the impact of these new measures remains dependent on the Treasury’s ability to create clear rules related to the implementation and possible forgiveness of the deferral. The latest Notice from the IRS does provide clarity, but many questions remain. Aprio is continuing to monitor information from the Treasury, and we are prepared to act as soon as new guidance comes to light. If you or your business are likely to be impacted by the new payroll tax deferral, consider working with your Aprio advisor to begin preparing a plan to either prepare for possible repayment or to support this new relief for your employees.