Employee Payroll Tax Deferral Provides Both
Opportunities and Challenges for Those Choosing to Elect Deferral

COVID-19 Business Update
Tax Group

Included in President Trump’s recent executive orders was a payroll tax memorandum calling for the deferral of select payroll tax withholdings for employees. The memorandum only addresses the 6.2 percent employee’s share of Social Security taxes but doesn’t apply to the 1.45 percent employee’s share of Medicare taxes. The payroll tax deferral only applies to employees with biweekly pre-tax income of less than $4,000.

One of the concerns expressed is that employees whose payroll taxes are deferred will owe those taxes next year when they file their 2020 tax returns thereby imposing serious hardships on employees who will face a substantial tax liability. Business groups and trade organizations are urging Congress and the Trump administration to work together on a way to provide tax relief to American families without imposing a big tax bill on them in the future under the executive order.

Trump has said he expects Congress will pass legislation forgiving those taxes, but it’s unclear Congress will do that next year, as it may depend on the outcome of the November election who will be in Congress and the White House. Currently, forgiveness of the payroll tax deferral has little support from either Democrats or Republicans in Congress.

Some workers and employers may decide not to have the payroll taxes deferred to avoid problems next year. However, for those that make that choice they forego the possibility of receiving the benefits of possible future forgiveness of these taxes.

One way of addressing the above would be for employees to elect to have payroll tax deferral, and at the same have the taxes withheld by employers, and either create an account or have their employers create an account that holds the funds. That way if the taxes are forgiven these employees will have the benefits of the forgiveness. And if the taxes are not forgiven, the funds are available to pay the taxes.

Employers, payroll companies, and tax professionals are anxiously awaiting guidance from the Internal Revenue Service and the Treasury Department on the payroll tax deferral, which is expected to be released soon before the deferral takes effect at the beginning of September.

The information presented here should not be construed as legal, tax, accounting, or valuation advice. No one should act on such information without appropriate professional advice and after a thorough examination of the particular situation.