On August 8, 2020, President Trump issued an executive order which will allow deferral of certain payroll tax payments. This action only applies to employees who generally earn less than $4,000 per biweekly pay period (approximately $2,000 per week or $104,000 annually). Such an employee may temporarily defer their portion of Social Security tax (6.2%). The order affects compensation paid from September 1st through the end of 2020.
To illustrate the potential effect of this provision, an employee with a regular annual salary of slightly less than $104,000 would be able to defer about $2,150 over the course of the entire period.
It is important to keep in mind that this is not tax relief, instead a deferral, so any postponed taxes will need to be paid at a later date, although the President’s order directs the Secretary of the Treasury to explore avenues to eliminate this obligation.
Also, the following questions will need to be answered between now and the September 1 implementation date. Many of these questions are outlined in a US Chamber letter sent to Secretary of the Treasury Steven Mnuchin, on August 12, 2020:
- How does this apply to people whose earnings fluctuate?
- Are the deferrals required or optional? How would employees choose whether to participate?
- Who will be obligated to make these payments if they are not eliminated? When? How?
- Will payroll processing companies be able to implement this change in the short window available, especially as needed guidance is still forthcoming?
We will continue to monitor this situation and provide more information as it becomes available.