COVID-19 Payroll Tax Deferral for Employees

Amidst ongoing debates and negotiations in Congress over the next steps in pandemic relief, the President issued three memoranda and an executive order of his own. The one that is on the top of most employer’s minds is the Memorandum on Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster.

The downside

The memorandum does not eliminate the employee’s obligation to pay those taxes later. While employees would benefit from having slightly more cash in hand for the last four months of 2020, they would need to repay those taxes later, possibly when filing their individual income tax returns for 2020. This could create unwelcome financial pressure in 2021.

The upside

The memorandum deferring payroll tax obligations would stop the withholding of the employee portion of Social Security and Medicare taxes from payroll checks for employees earning less than $104,000 per year. This would put a small amount of extra (borrowed) money into each payroll check issued during the period covered by the memorandum, which is September 1st through December 31st, 2020.

What to do?

For now, just wait. The President’s memorandum is not yet executed. It directs the Secretary of the Treasury to authorize the deferral of payroll tax withholdings, and that has not happened yet.

Other implementation issues must also be addressed. As of today, there have been no changes to an employer’s responsibility to withhold and remit payroll taxes, and no change to the penalties that are imposed on employers (especially responsible officers such as a CEO, CFO, or the equivalent) for not remitting those taxes to the IRS.

Final guidance must also address other concerns such as: eligibility for employees whose pay varies, how the deferred amount will be collected and paid, deferred tax collections for employees who change jobs, and the effect on employees’ future Social Security benefits.

Stay tuned to our blog for updates, as we watch for more guidance on this and other pandemic relief topics.