Breaking Down the Proposed Employee Payroll Tax Deferral Memorandum

On August 8th, 2020 President Donald Trump issued a Memorandum for the Secretary of the Treasury.  The Memorandum directs the Secretary of the Treasury to defer payroll tax obligations in light of the ongoing COVID-19 disaster.  The deferral relates to the withholding, deposit and payment of the 6.2% share of the employee’s social security tax (6.2% of wages up to $137,700) as outlined below:

  • Deferral is for the period of September 1, 2020 through December 31, 2020
  • Deferral is available to employees with gross biweekly income of less than $4,000 on a pre-tax basis (or the equivalent amount with respect to other pay periods)

Beyond the simple fact of the deferral outlined above, the President has also asked the Secretary of the Treasury to “explore avenues, including legislation to eliminate the obligation to pay the taxes deferred by this memorandum”.  This directive for exploration and legislation could lead to additional guidance which could eliminate the payroll tax obligations (for the period covered by the Memorandum).

While the memorandum appears to be very taxpayer-friendly, it raises a number of questions and issues for employer and employees.  The AICPA’s Tax Executive Committee has asked the Treasury and the IRS for additional guidance on specific aspects of the deferral. These requested items include:

  • Confirmation that an eligible employee is responsible for making an affirmative election to defer
  • Confirmation of the date range in which an eligible employee can make an affirmative election
  • A model notice that an employer can furnish to eligible employees to inform them of the election
  • Guidance around the $4,000 in compensation: confirming that it is a cliff rather than a weighted scale, and that the $4,000 is looked at by each employer of an employee (related party guidance to be provided if needed)
  • Confirmation that ultimate responsibility of deferred taxes will remain with employees not the employer when the taxes become due
  • Addressing which penalties are waived, including which penalties will be waived for responsible parties
  • Addressing if the additional take home pay can be used to satisfy other employee obligations with the government (401(k) loan repayments, garnishments, and child support payments)
  • Defining a due date for the deferred taxes and methods for which payment of the deferred taxes will be made

In the memorandum, the Secretary of the Treasury is authorized to issue guidance on implementation of the payroll tax deferral.  With the directive from the President as well as the specific requests from the AICPA, we hope to see that guidance issued shortly as the start of the deferral period is supposed to begin on September 1, 2020.