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15 September 2020 / COVID-19 IRS Updates

Employers Seek Guidance As Payroll Tax Deferral Becomes Effective

15 September 2020 > COVID-19 IRS Updates

On Aug. 28, the IRS issued Notice 2020-65, which allowed employers to defer the withholding, deposit, and payment of certain payroll taxes on wages from Sept. 1 through Dec. 31, 2020. While the Trump administration believes this will provide Americans with much-needed relief, many are worried about the effects this will bring to early 2021. 

 

What Prompted The Recently Signed Executive Orders

As the CARES Act was set to expire, The Senate and House of Representatives were expected to sign an economic relief package aimed to continue helping those being affected by COVID-19. On July 31st, 2020, after failed attempts to pass new stimulus legislation, the CARES Act expired. Following the expiration, Democrats and Republicans continued negotiations with hopes to provide continued relief through a new stimulus package. However, both sides failed to agree on key issues, ultimately, negotiations ended without a bipartisan stimulus package. 

With a lack of new stimulus efforts, Trump enacted his executive powers to provide relief to Americans. On August 8th, 2020, Trump announced four executive orders aimed to relieve Americans from hardships due to COVID-19. These four orders addressed extending increased unemployment benefits, extending the eviction moratoriums, student loan relief, and a deferral of payroll taxes from Sept. 1, 2020, to Dec. 31, 2020. 

 

What is the Payroll Tax Deferral Executive Order 

As an attempt to provide more funds to Americans, Trump ordered employers to defer the withholding of payroll taxes to those who bring in a biweekly income of under $4,000 a pay period (about $104,000 annually). Under the new Executive Order, Americans would not pay the 6.2% employee share of Social Security taxes until the order ends on December 31, 2020. Following December 31st, Americans will still owe the unpaid taxes, unless congress decides to provide forgiveness on the deferred taxes. 

 

What Role Will Employers Play In Deferral

With the new order beginning as of September 1st, many employers have started to worry about how to implement this new policy and what role they will play. While campaigning, Trump has recently expressed the idea of eliminating the tax, which would result in the current deferrals being forgiven in 2021. With the outcome of whether or not congress will approve the payroll forgiveness, or if this tax will be eliminated, many questions about the deferrals future remain unanswered. 

If these taxes are not forgiven, Americans will be forced to make up these payments between January and April of 2021. Employers will take on this responsibility and will have to organize a system to collect these unpaid taxes. The fear with this is not only how to implement a new process to collect these taxes, but what future issues will this bring to the employer. 

 

Concerns of Payroll Deferral 

One major fear of the deferral is what effect this will have on Americans in early 2021. Many employers are worried that having to reduce the amount employees receive in their paychecks will cause another financial struggle to those still seeing negative effects from Covid-19. If Americans can’t afford to pay these taxes back, will the employer be financially responsible for these payments? Another worry would be the financial liability employers will have if employees leave the company before January 1, 2021. With questions of employer liability increasing, many are seeking the IRS to provide clarification of what will be required of the owed taxes from employees who leave before the end of the year. The IRS has offered minimal detail on the matter, stating that if necessary, “employers can make arrangements to collect the taxes from employees...” which leaves employers worried about the new order. 

 

What Should Employees Know

With all the unknowns in the matter, many businesses are expected to not participate in the deferral. Companies do not want to burden themselves or their employees come 2021. There’s also no guarantee Congress will pass legislation to forgive the deferred taxes. Those companies that are participating in the deferral, it is crucial employees are notified and understand the process so they aren't surprised come early 2021. If these taxes are not forgiven employees could see 12.4% of their salary taken to make up the deferred payments to the IRS. 

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Megan Weinberg

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