By Katherine Goelz
On August 8, President Trump signed an Executive Order that directed the Secretary of the Treasury to use his authority “to defer the withholding, deposit, and payment” of employee Old Age, Survivors, and Disability Insurance (OASDI) tax on wages or compensation paid from September 1 through the end of 2020. Normally, OASDI imposes a 6.2% tax on wages and are used to fund the Social Security program. The stated intent of this executive order was to put money into “the pockets of American workers and generate additional incentives for work and employment, right when the money is needed most.”
On Friday, August 28, four days before the deferral was to take effect, the IRS released guidance on how businesses should proceed, and for whom the executive order applies. It applies to all employees with bi-weekly wages that are less than $4,000.00.
The Treasury indicated that payment of the withholding is “postponed until the period beginning on January 1, 2021 and ending on April 30, 2021.” If the employer fails to pay the deferred taxes during the first four months of 2021, “interest, penalties, and additions to tax will begin to accrue on May 1, 2021.”
The Treasury advised that employers “may make arrangements to otherwise collect the total Applicable Taxes from the employee.” For businesses who decide to proceed with the tax deferral, the result for employees is likely a larger amount of take-home pay during the remainder of 2020, but additional withholding in 2021, as employers seek to repay the deferred amount.
Neither the executive order nor the guidance issued by the IRS explicitly stated that the payroll tax deferral is mandatory; the executive order stated that “the deferral shall be made available.” Currently, at least one federal office, the Defense Contracting Management Agency, has indicated that they will be implementing the deferral, but it remains to be seen how many businesses will follow suit.
Unfortunately, the executive order and the guidance are poorly written. Businesses have been asking the IRS for more clarification, which hopefully comes out sooner rather than later.
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