Payroll Tax Deferral and Federal Employees

In response to lack of Congressional action to assist Americans impacted by the pandemic-related economic downturn, the Trump Administration issued an Executive Order to defer payroll taxes through the end of calendar 2020. Most people probably don’t even know what that means. If you are not employed, it means nothing. If you are an employer, it means figuring out the news rules and how to follow them.

Payroll taxes are paid on wages and other earned income to support the Social Security and Medicare benefit systems. In general, employers and employees each pay half of the total 15.3% tax. Employers withhold the employee portion and remit the total amount to the IRS as wages are paid. The Executive Order allows employers the option to defer payroll tax payment for income earned from September 1 to December 31, 2020. Deferred taxes would be due by April 30, 2021, after which past-due interest will accrue.

Many private employers are hesitating to take the deferral option. Tracking the deferral is a headache. Withholding extra tax in early 2021 is another headache. All these changes are a burden on payroll processors and create additional expenses. Not to mention that if your business does not have the cash for payroll taxes now, chances are you will not be able to absorb the “double” expense a few months from now.

Federal agencies and employees don’t have an option. Guidance from the IRS is still not entirely clear, but federal representatives have stated that the government will begin deferring the withholding of payroll taxes for federal workers in September. The quasi-good news is that the payroll tax deferral will apply only to employees making less than $104,000 in annual gross wages, calculated on a pre-tax basis. Still, this is going to impact tens of thousands of workers.

The Secretary of the Treasury expressed a desire to explore forgiving the repayment of these taxes. However, a “desire to explore” is not a rule, so the IRS is advising federal and other impacted workers to hold on to those extra funds to have them available to pay back. The IRS guidance says that employers should withhold the deferred taxes from wages and compensation paid between January 1, 2021 and April 30, 2021. That might be okay when impacted workers are still employed by the same employer, but what if a worker leaves before the deferred taxes are repaid? Well, the IRS guidance advices employers to take collection action against former employees. Sounds unpleasant, not to mention more work for employers.

Regardless of your politics, this Executive Order certainly seems like extra cost and effort, plus some added risk, in exchange for questionable gain. Unfortunately, federal workers earning less than $104,000 annually will have to be aware of why their paychecks are a little higher in late 2020. They also need to know to save that extra money for early 2021, when their paychecks are going to be surprisingly low.