The executive order directs the secretary of the Treasury to defer some payroll tax obligations. Any employee who is paid less than $4,000 before taxes per bi-weekly pay period (annually $104,000) is eligible. The deferral period is September 1 through December 31, 2020.
Typically, employees and employers each pay half of the total 12.4% Social Security tax due for each worker. But under the executive order, employers may choose to refrain from withholding the 6.2% from employees for Social Security but must still contribute their own portion for each worker. However, the CARES Act did allow for a deferral of the employer portion of the 6.2% Social Security tax as well.
The deferred amounts will not incur penalties or interest, according to the executive order.
Guidance released by the IRS on August 28 specifies that deferred payroll taxes must be repaid between January 1, and April 30, 2021. Any tax that is not repaid within that window will be subject to interest and penalties. Employers could collect those penalties from their employees if necessary, according to the announcement.
The choice of whether or not to defer the payment of Social Security tax is made by the employer. Some companies may allow for each employee to make the choice as to whether or not they can defer the deduction of the Social Security taxes. Workers who see an increase to their paycheck this fall could see double the Social Security tax withheld from their paychecks at the start of 2021 in order to pay back the deferral. Many federal government employees will notice a difference in their paychecks starting with those issued in mid-September. That includes enlisted service members, as well as civilian employees of the Department of Defense and other federal agencies.
You Will Probably Need to Repay Deferred Taxes
The President has the authority to defer payroll taxes because he has made a nationwide emergency declaration in March. In a state of emergency, the secretary of the Treasury may make changes to taxpayer liability. But it is up to Congress to decide whether or not to permanently forgive the deferred payroll taxes.
There are still many questions as to the repayment method of the deferred taxes for employees who are fired or voluntarily leave their jobs. Many employers have elected to delay implementation of the payroll tax holiday until additional information is provided by the IRS.