Finances and Taxes

Everything Small Business Owners Need to Know About President Trump’s Proposed Payroll Tax Deferral

Gusto Editors  
state capitol building

On Saturday August 8, 2020, the president signed four executive orders and memorandums related to the COVID-19 pandemic. Congress has spent weeks negotiating over the next pandemic relief bill and has not come to an agreement; while waiting for Congress to act, the president stepped in through executive order. The legislation signed by the president includes a memo on deferring payroll taxes (we’ll dive into the details in this post) and a memo on federal unemployment benefits.

There are many open questions about how the government will implement these executive orders and what this means for small businesses and individuals. Because there is a great deal of ambiguity surrounding how these actions may be implemented—including timeframes and  whether the Executive Branch can legally take and effectively manage these actions, there will be some delay before we know more.

In the coming days, the Office of Management and Budget (OMB), the Treasury Department, and the Internal Revenue Service will likely weigh in with more information about implementation. While we wait to see how things unfold—and whether these executive actions will be implemented—make sure you understand how the payroll tax deferral may affect you and your employees. 

How are payroll taxes impacted by the executive memo?

Payroll taxes refer to the taxes paid by both employees and employers for national Social Security and Medicare funds. 

The executive memo signed by Trump related to payroll taxes refers only to employee Social Security taxes, which represent 6.2% of an employee’s paycheck. 

The executive memo would defer the employee’s payment of Social Security taxes between September 1, 2020 and December 31, 2020. 

Depending on salary, the amount that appears in your employees’ paychecks could be significantly more sizable within this four-month period; the maximum amount an employee can defer between the first of September through the remainder of the year is $2232.

Who will be affected by this payroll tax deferral and how? 

As mentioned above, only employee-paid payroll taxes are addressed in this memo. There is already an employer payroll tax deferral in place under the CARES Act

The memo states that employee Social Security taxes can be deferred, which means that employee paychecks could be larger for the next four months. 

In order to defer these tax payments does any action need to be taken by the employer or the employee?

The way that the order is written, it seems that employees would opt-in for this tax deferral, and employers must honor their opt-in requests. But employers may ultimately be on the hook for paying back those taxes when due. The IRS will likely be providing more clarity on this point in the coming weeks.  

Currently, a great deal of ambiguity surrounds this issue; Gusto is seeking clarification on deferred taxes for terminated employees and other open questions.  As we learn more about the actions that must be taken in order to take advantage of this tax deferral, we will update this post.

When will this go into effect?

The memo states the tax deferral will be in effect from September 1, 2020, through December 31, 2020. That means within those months, qualifying employees who have elected to defer their tax payments will have an additional 6.2% in their net pay, because the amount typically taken out for Social Security will not be taken out.

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Who is eligible for payroll tax deferral?

In order to be eligible for payroll tax deferral, an employee must generally make less than $4,000 every two weeks (which means they must make less than $104,000 per year). 

Will employees have to pay the deferred payroll taxes eventually?

Yes. 

This is important, so make sure you understand this as both an employer and employee. If you are an employer, communicate this clearly to your employees: without further action by Congress or President Trump, it is likely that the employee’s deferred payroll taxes will need to be repaid. Although paychecks will be bigger in the meantime, eventually these deferred taxes will be paid by employees. 

There may be additional ramifications of taking advantage of this tax deferral, which are still unclear. 

President Trump is calling on Congress to make this tax deferral a permanent cut, but as of now, that has not happened. The memo also states the Treasury Secretary will explore potentially eliminating the obligation of employees to pay the deferred taxes, but, again, as of now those options have not yet been explored.

Anyone who takes advantage of this payroll tax cut should be prepared to pay these taxes in 2021. 

As we learn more about how this executive action affects you and your business, we will continue to update this post—check back for more information.

You may have noticed the Gusto platform does not accommodate employers who are honoring the payroll tax deferral for their employees. Once the deferment period ends, it is ultimately the employer who will be responsible for paying the deferred amounts back to the government, even if they haven’t collected the taxes from their employees. Because this puts employers in a difficult position, and because customer and partner requests to support this deferral program have been low, we have decided to wait before making changes to the Gusto platform.

Updated: September 17, 2020

Comments

  • Cheryl Edwards

    How do I as an employee opt in to this deferment? My HR states it will all be handled by GUSTO but I do not see any options.

    Reply
    • Gusto Editors

      Hi Cheryl! Gusto is not currently planning to support the deferral without additional guidance being provided by the Treasury. Employers are not required to support this for employees that request it.

      In the future, if you have questions about your Gusto account or Gusto features, please contact our support team by heading over to the Help section in your Gusto account or visit Gusto’s Help Center at support.gusto.com.

      Reply
  • Ella Pantazis (Lila)

    anything further on the tax deferral? IF an employee chooses to opt-in, how do that do that?

    Reply
    • Gusto Editors

      Hi Ella — Gusto is currently not planning to support the deferral as we await additional guidance from the Treasury. Keep in mind that as an employer, you are not required to support this for employees that request it. If you have further questions about using your Gusto account, please contact our support team by heading over to the Help section in your Gusto account.

      Reply
    • Corey Boltz

      Gusto Editors, this is not a correct interpretation. We need further guidance from you.

      The Presidential Memorandum (which can be found here: https://www.federalregister.gov/documents/2020/08/13/2020-17899/deferring-payroll-tax-obligations-in-light-of-the-ongoing-covid-19-disaster) states the following:

      “The deferral shall be made available with respect to any employee the amount of whose wages or compensation, as applicable, payable during any bi-weekly pay period generally is less than $4,000, calculated on a pre-tax basis, or the equivalent amount with respect to other pay periods.”

      The language “shall be made available…to any employee” suggests that we, as employers, have an obligation to give our employees an option. Furthermore, the directive by the Treasury Department also contains directive language that suggest we are to implement this:

      “For Affected Taxpayers, the due date for the withholding and payment of the tax imposed… is postponed until the period beginning on January 1, 2021, and ending on April 30, 2021.”

      This does not save we have an OPTION to postpone….it states “IS postponed”.

      So, can you please clarify how we can meet our obligation under these orders if you are not “supporting” this directive?

      Reply
      • Gusto Editors

        Hi Corey — our legal team has reviewed the Memorandum and we’ve determined that the terms ‘allow’ and ‘available’ suggest that it is not mandatory. The memorandum also does not indicate that an employer “must” or is “required” to do this. Additionally, Gusto has been on monthly calls with the IRS and we have confirmed on these calls that this is optional for employers to implement.
        If you’re still unsure about our answer, feel free to call the hotline at the bottom of the guidance, which requests that callers not leave a message if their question is if this is optional for employers, as the answer is yes.

        Reply
  • Tom Walls

    If my employee wants to deferral these taxes and they are eventually forgiven, I am on the hook for what the employees wanted to defer since I did not ( Gusto) give them the option?

    If other employers (like the Federal Government ) allow deferrals and they are forgiven it seem like I am a risk for not allowing my employees the same option. Gusto should accommodate this program.

    Reply
    • Gusto Editors

      No, this program is optional for employers to offer these tax deferrals to employees since the employer is ultimately responsible for paying these taxes, even if they are unable to collect the taxes from their employees. The federal government is willing to assume the risk of paying these taxes at a later date out of their own pocket if the federal employee is no longer working for them.

      If an employer does not offer the deferral, they are not at risk for having to pay their employee’s taxes. Additionally, if the taxes are later forgiven, the employer is not responsible for paying back the employee for the taxes that were withheld and paid to the IRS on their behalf. We have created an FAQ to assist clients in answering questions to their employees.

      Gusto’s platform does not accommodate employers who are honoring the payroll tax deferral for their employees. Once the deferment period ends, it is ultimately the employer who will be responsible for paying the deferred amounts back to the government, even if they haven’t collected the taxes from their employees. Because this puts employers in a difficult position, and because customer and partner requests to support this deferral program have been low, we have decided to wait before making changes to the Gusto platform.

      Reply
  • Jason S.

    What specifically are you awaiting additional guidance on? Is it regarding how it is going to be paid back?

    Thank you,

    Reply
    • Gusto Editors

      Hi Jason — we have created an FAQ to assist our clients in answering questions to their employees. Gusto’s platform does not accommodate employers who are honoring the payroll tax deferral for their employees. Once the deferment period ends, it is ultimately the employer who will be responsible for paying the deferred amounts back to the government, even if they haven’t collected the taxes from their employees. Because this puts employers in a difficult position, and because customer and partner requests to support this deferral program have been low, we have decided to wait before making changes to the Gusto platform.

      Reply
  • Chris

    Hi. In your responses to the comments above, you mentioned that employers are not required to support this for employees who request it. Can you kindly provide the supporting information for this? Thanks!

    Reply
    • Gusto Editors

      Hi Chris — this program is optional for employers to offer to their employees since the responsibility for repaying these taxes falls on the employer, not the employee. If the employer opts to support this for their employees, based on the language in the memorandum, both the withholding and payment of the employee’s social security tax must be deferred (the employer can’t withhold the taxes but not pay them to the IRS).

      Reply

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