Executive Order on Payroll Taxes

Uncategorized Aug 17, 2020

Hey entrepreneurs! 

Many of you have been looking for some clarity around how the President's recent executive orders related to payroll tax deferrals might impact your businesses.

On August 8, President Donald Trump signed an executive order authorizing a temporary payroll tax deferral. The order defers the withholding of Social Security taxes from employees’ paychecks for the period between September 1, 2020 and December 31, 2020.

The Social Security tax is paid by employees and employers, each pay half of the total 12.4% due for each worker.

Any employee whose pretax wages or compensation during any biweekly pay period that is generally less than $4,000 would be eligible for the deferral.

Under this order, employers would not be obligated to withhold the 6.2% from the employees’ paycheck.

As an example, this means that an employee that earns $50,000 a year would receive an extra $1,033 in total during the four months.

The order also instructs the Secretary of the Treasury to issue guidance to implement the deferral and seek congressional approval to make the deferral forgiven.

Once issued, employers should review the guidance to determine how the deferral will be repaid if Congress does not approve forgiveness. 

(Note: You may recall that the CARES Act has already delayed the employer’s half of Social Security beginning on March 27, 2020 and ending on December 31, 2020.

The deferral is payable 50% in 2021 and 50% due in 2022.)

So what does it mean?

Basically, all the order says is that employees can have their payroll taxes deferred and can instead take that money home each paycheck.

The key word is DEFERRED.  Everyone should remember that this means that (as of now anyway) these taxes will have to be repaid at a later time.

This SOUNDS great and it could provide some MUCH needed cash to employees -- but there are some unanswered key questions like when those payroll taxes will have to be paid back and who is responsible to pay them if an employee leaves the company for some reason.  This could mean that business owners get stuck with paying back these taxes if the employee leaves. We don't know for sure yet.

The upside of this is that it's essentially a 0% interest loan from the government to employees at a time when cash is tight.  Maybe that loan will be forgiven.  Maybe not.  

There are a lot of unanswered questions that still remain.  I suggest holding off (if possible) until Uncle Sam gets around to giving us some more clarity on how the program will be handled.  

I expect that payroll providers will be announcing options for opting in in the next week or two - so check with them for more information on how to handle the nuts and bolts.