As the pandemic, and its physical, mental and financial toll, continues to rage, business owners are continuing to look for ways to lessen the negative impacts on their companies and do what they can to keep employees at the same time. In an attempt to help, President Trump recently issued an executive order eliminating the payroll tax, starting on September 1, 2020, as an economic stimulus. The theory is that a reduction or elimination of the Federal Insurance Contributions Act (FICA) tax allows business owners to pass through more funds in the form of employee wages, therefore increasing the money available to spend in the economy at large.
With this order, withholding, deposit and payment of the employee’s share of the 6.2% Social Security tax are deferred on wages paid between September 1 and December 31 of 2020, without incurring any penalties or interest. The deferral only applies to employees with bi-weekly, pre-tax income of less than $4000 (or different pay period of similar amounts), which is roughly an annual salary of $104,000.
The order does not apply to the employee’s share of the 1.45% Medicare tax on wages, which will still need to be withheld, deposited and paid during the deferral period.
In general, Congress has been opposed to this sort of payroll holiday as an economic stimulus because it is considered inefficient and slow. It only provides a benefit to individuals who are employed, so does nothing to help the millions who are out of work. It is also considered to have less impact because it is applied in each paycheck, rather than in a lump sum like the economic impact payments made earlier this year.
There are still many unanswered questions, so we are waiting on the Treasury to issue guidance on how the deferral will actually work in practice. For example, if the deferral expires as planned at the end of the year, will employers have to start paying the four months’ worth of FICA taxes back in January 2021? As you may remember, the CARES Act from March 27, 2020 allows employers to repay previously deferred amounts over two years, so would this time period be extended, or will employers have to pay back this deferral at the same time as the rest? It is also unclear if employers can opt out of the deferral altogether or if they have to temporarily cease withholding employees’ share of FICA in addition to not depositing and paying the tax. This will require IRS guidance in addition to what the Treasury advises.
Obviously, there will be further updates on this executive order, and we will update you on them as they become available. In the meantime, if you have questions call or email us and we’ll do our best to help in any way we can.