Defer Payroll Taxes Beginning September 1, 2020

By Brian Ellenbecker

On August 8, 2020, President Trump issued four Executive Orders designed to provide relief to individuals experiencing hardships due to the COVID-19 pandemic.

The Executive Order that is likely to impact the largest number of people is the deferral of payroll taxes, which is the focus of this blog post. The other three orders issued addressed enhanced unemployment benefits, eviction moratoriums and student loan relief.

The Social Security portion of the payroll tax, which represents 6.2% of wages, up to $137,700, can be delayed. The employee’s share of the Social Security tax on wages earned between September 1, 2020 and December 31, 2020 can be deferred without penalties or interest. The deferral only applies to employees with bi-weekly, pre-tax income of less than $4,000, or a similar amount when a different pay period applies. This limit is roughly equal to annual compensation of $104,000.

It’s important to note that this Executive Order does NOT defer the 1.45% Medicare tax, which still must be withheld during that window.

This Executive Order defers, but does not forgive, an employee’s Social Security tax liability. While questions were raised regarding the legality of some parts of the Executive Orders, the President does have the ability to delay the collection of tax when an emergency is declared. This is the same authority that allowed for the federal income tax filing deadline to be extended to July 15. However, the President does not have the authority to unilaterally forgive tax payments. Only Congress has this authority. Without Congressional action, the amount that is deferred will have to be paid at a later time.

While details are light on how repayment will work at the moment, it’s likely that the employer would have to start paying the deferred taxes in January 2021, which would be on top of the employee’s regular tax withholdings.

It’s also uncertain as to how the deferral would be implemented. It’s possible that an employer may not want to take advantage of the deferral. It’s also unclear whether there is a requirement to stop withholding, or if it’s simply optional. This distinction creates some potential conflicts with state employment laws. Some states require an employee’s written permission to withhold anything from their wages that the employer is not required to withhold. If this provision is deemed “optional," the employer would need the employee’s written permission to defer Social Security tax.

While the deferral of the Social Security tax was meant to put more money in an employee’s pocket, if the employee  knows they have to start paying the deferred amount back in a few months, it’s possible they will either set this money aside or forgo the deferral altogether, if that is an option. If that ends up being the case, it could limit the stimulating effect on the economy.

More details are sure to arrive in the coming days as the September 1 start date fast approaches. Additional details will help everyone understand the actual impact this change will have on their finances for the rest of the year.