President Donald Trump signed four Executive Orders on August 8th, 2020. One of them pertains to the deferral of payroll tax obligations in light of the ongoing COVID-19 federally declared disaster. It is kind of a “federal payroll tax holiday” which the President wants to get included within any new COVID-19 pandemic relief legislation. For sure, the legality of this Memorandum is still a moot point.
Though it is too early to know the exact procedures and rules in this regard, we shall at the moment discuss what we know as of date, in an easy to understand FAQ format.
What does this specific Memorandum relate to?
This Memorandum directs the Secretary of the Treasury to use his authority to defer certain payroll tax obligations with respect to the American workers most in need.
What is the aim of this Memorandum?
Per President Trump, this Memorandum targets to put money directly in the pockets of American workers and generate additional incentives for work and employment, right when the money is needed the most.
What portion of the payroll taxes can be deferred?
This Memorandum provides for deferral of the withholding, deposit and payment of the employee’s portion of Social Security taxes, which is 6.2% of wages.
Wages for which period are eligible for this deferral?
Wages or compensation, as applicable, paid during the period of September 1st, 2020 through December 31st, 2020 are eligible for this deferral. It is to be noted that this deferral applies for the employee portion of Social Security taxes (6.2%) on the wages or compensation actually paid during this period, not earned. This means that the employee portion of Social Security taxes on the wages earned during August 2020 but paid on or after September 1st, 2020 shall be eligible for this deferral.
Which employees are eligible for this deferral?
Per the Memorandum, the deferral shall be made available with respect to any employee for whom the amount of wages or compensation, as applicable, payable during any bi-weekly pay period generally is less than $4,000, calculated on a pre-tax basis, or the equivalent amount with respect to other pay periods. This roughly translates to $104,000 per annum. Any employee earning more than this amount may not be eligible for this deferral.
Will there be any penalty or interest on the deferred amount of payroll taxes?
Generally, the IRS has the authority to assess a Trust Fund Recovery Penalty (TFRP) for a failure to withhold. The TFRP imposes a 100% penalty on persons who are responsible for withholding certain taxes, including employment taxes. But do not worry! According to one of the conditions stated within the Memorandum, amounts deferred pursuant to its implementation shall be deferred without any penalties, interest, additional amount, or addition to the tax.
Will the payroll taxes deferred according to this Memorandum be eventually forgiven?
This is something which is not certain yet. According to some legal experts, the President may have the authority to defer the payroll taxes, but may not have the power to forgive these taxes. The power to forgive the taxes is only with the Congress. But President Trump seems to be in support of forgiving these taxes, and that’s the reason why he has included the following text within the Memorandum “The Secretary of the Treasury shall explore avenues, including legislation, to eliminate the obligation to pay the taxes deferred pursuant to the implementation of this memorandum.” So it’s wait and watch to see how this forgiveness provision takes shape in the coming weeks.
What else do I need to know in this regard?
We understand that you might have a myriad of questions circling within your mind. But unfortunately, there is not much statutory or regulatory information available right now which we can share with you all. There are still a lot of unanswered questions such as – Is this order mandatory? When does the deferred taxes become payable? What would be the source of funds when these taxes become payable? If the employee has two jobs, how would the wages limit apply? What if the employee is no longer working for that particular employer at the time these taxes become payable? Will this apply to self-employed persons? How shall this deferral interact with the other CARES Act relief such as the Employee Retention Credit and the employer portion payroll taxes deferral? The list is never-ending!
When should I expect all my questions to be answered?
This Memorandum includes a direction to the Secretary of the Treasury to issue guidance in order to implement the same. Since the period of deferral starts on September 1st, 2020, we believe that the Treasury shall release specific technical guidance sometime between now and September 1st, 2020, which probably should help us to know more about this deferral in a better way with regards to implementation and processes.
Sources of information for this article:
This article has been compiled based on the Presidential Memorandum titled “Memorandum on Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster”.
The Secretary of Treasury will probably issue more guidance for further clarification regarding this memorandum. We are continuously monitoring the situation and shall be providing updates on subsequent developments on this topic as and when they are released.
Rest assured, we are always there to get the best out of the law for you and your business!
How can Initor Global help the CPA Firms?
We can assist you in getting the maximum benefit from this memorandum, can provide guidance on the documentation which is necessary to be maintained, and also for assisting in maintaining proper accounting records based on the documentation which you provide and by using the excel formats and templates which your firm usually follows. This will free up the paperwork and computation time on your part and give you an opportunity to utilize this time for getting more business from your clients, while we assist you in handling your back-office work. We can also assist you in preparing Payroll Tax Returns and in maintaining complete accounting records for this purpose as well as on a continuous basis for the entire year.
The information contained within this article is provided for informational purposes only and is not intended to be a substitute for obtaining accounting, tax, or financial advice from a professional accountant.