COVID-19 Small Business Resource Center

Payroll Deferral

President Trump Issues Memo on Deferring Payroll Tax Obligations

Updated: August 28, 2020

President Trump signed a memorandum on August 8, 2020 that directs the Treasury Secretary to defer the withholding, deposit, and payment of employee Social Security taxes for wages paid beginning September 1 through December 31, 2020.

The deferral will be available to any employee whose wages generally are less than $4,000 in a biweekly pay period, or the equivalent amount with respect to other pay periods.*

Background:

  • Employees pay a 6.2% Social Security tax on wages up to an annual limit ($137,700 in 2020).
  • Employees also pay Medicare tax, but this is not affected by the executive memorandum.

Memorandum:

The memorandum provides that amounts deferred "shall be deferred without any penalties, interest, additional amount, or addition to the tax." It also directs the Treasury Secretary to "explore avenues, including legislation, to eliminate the obligation to pay the taxes deferred pursuant to the implementation of this memorandum."

Further guidance needed:

There are several elements that remain unknown until the Internal Revenue Service (IRS) issues guidance. For example:

Income limits:

The IRS will need to clarify whether a per-payroll limit will be enforced, an annual limit, or some combination of the two. For example, if the per-pay period limit of $4,000 (biweekly) is enforced, the maximum tax deferral would be $2,232 (assuming nine biweekly pay periods beginning September 1, 2020). If the $104,000 annual earnings limit is enforced, the maximum tax deferral would be $6,448, assuming an employee with no prior earnings started work on September 1 and earned $104,000 or more in 2020.

Pay fluctuations:

The IRS also may need to clarify whether employers would be expected to adjust the deferral as employees fluctuate above and below the limit. For example, if an employee is paid $4,100 in a biweekly pay period, they would pay the full 6.2% on such earnings ($254.20). If the same person was paid $3,100 in the subsequent bi-weekly pay period, they would qualify for deferral of Social Security taxes on the $3,100. It's unclear whether the employer would be expected to refund the $254.20 withheld on the prior payroll, since the average earnings after September 1 is less than $4,000.

Nonwage income:

Another question is whether the deferral applies strictly to wage income. For example, employees may be eligible for the deferral based on wages, but they may have significant nonwage income, which could disqualify them from the deferral.

Employer Reporting Requirements

The IRS will need to advise employers if there will be reporting requirements associated with the deferral. Employers may need to separately report qualified Social Security wages paid during the deferral period on the Form W-2 and Form 941, and possibly other information.

Because ADP® is waiting for key guidance from the IRS and Treasury, the employee Social Security tax deferral feature is not yet available. The IRS is aware that many employers will not implement the deferral by September 1, 2020. Once guidance is published, we'll announce how to implement the changes.

*This maximum annual wage limit was described in a separate White House announcement as "available to Americans earning less than $100,000 a year." However, the $4,000 biweekly limit in the memorandum equates to $104,000 annually. The IRS is expected to clarify the per-payroll and/or annual maximum amount in its guidance.

New Guidance Issued on Deferral of Employee Social Security Tax

The U.S. Treasury Department and Internal Revenue Service (IRS) have issued Notice 2020-65, implementing the recent Presidential Memorandum that allows employers the option to defer (i.e., postpone) withholding and payment of Social Security tax for wages paid September 1, 2020 through December 31, 2020.

Key Takeaways:

Employers considering whether to defer employee Social Security taxes should be aware of the following key takeaways from the Notice:

Liability:

Employers are liable for collecting and paying the full amount of employees' deferred Social Security taxes to the IRS after December 31, 2020.

Repayment:

Employers are required to withhold the total taxes deferred for an employee from the employee's wages in equal amounts per pay period from January 1, 2021 to April 30, 2021. This withholding will be in addition to the normal Social Security tax due for 2021 wages paid during the same period, which may cause some questions and concerns.

Example: If an employee deferred a total of $800 in 2020, an employer that has eight scheduled payrolls between January 1 and April 30, 2021, will deduct $100 per pay from the employee to collect and pay the full amount deferred in 2020.

Employee separations:

If an employee isn't employed with the employer for the full four-month period, the employer is still obligated to pay the total deferred taxes to the IRS. Interest, penalties and additions to tax will begin to accrue on May 1, 2021. In the event that an employee won't be employed through April 2021, the employer should make arrangements to collect all amounts deferred from the employee.

When obtaining employee elections to defer (see below), consider requiring employees to acknowledge that deferred amounts will be withheld from wages beginning in January 2021, and that the company may also use other arrangements if necessary to collect any deferred taxes, including from employees who separate employment before the full amount of deferred taxes is withheld.

Employee election to defer:

The Notice doesn't obligate employers to defer employee Social Security taxes, and Treasury Secretary Steven Mnuchin has described the program as optional for employers. Both the Notice and Presidential Memorandum are silent, however, on whether employers must first obtain the affirmative opt-in of employees before deferring their employee Social Security taxes. Because the current program is merely a deferral of taxes lasting only a few months, many employees may prefer that taxes not be deferred.

Employers that wish to offer this option should consider providing employees with a detailed explanation. Employees who wish to defer their Social Security tax should make an affirmative election to do so and employers should maintain a copy of such elections. ADP® has prepared a sample notice employers can use for this purpose.

Further Guidance Expected:

The IRS hasn't yet issued guidance as to the reporting requirements associated with the program. Deferred amounts will be reported on Form 941, and possibly Form W-2. The IRS will need sufficient information concerning amounts deferred to reconcile and collect such amounts from the employer if necessary.

Note: RUN Powered by ADP® (RUN) now enables you to choose whether to participate in the employee Social Security tax deferral. Deferral will not be enabled for your employees automatically; we will need your explicit instruction. If you choose to participate, your employees can choose whether to defer their Social Security taxes for the remainder of 2020 (and pay them in 2021). Before you decide whether to opt in to the deferral, it is critical that you understand how it works and how the deferred amounts will be repaid. For a summary of guidance, FAQs, and other resources, go here. If you would like to activate this feature, go to the Tax Overview screen in RUN and then click Edit for the Federal Taxes.