Trump's Payroll Tax Deferral of 2020: What Happened?

On August 8, 2020, former President Donald Trump signed the Executive Order, "Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster." This executive order allowed employers to defer the employee portion of Social Security payroll taxes for certain individuals in the final four months of 2020. On August 28, 2020, the Internal Revenue Service (IRS) issued Notice 2020-65, which provided additional guidance for employers on the implementation of the executive order.

The intention behind the executive order deferring payroll tax was to provide additional relief for employees working through the coronavirus pandemic. According to the Presidential Memorandum, Trump directed "the Secretary of the Treasury to use his authority to defer certain payroll tax obligations with respect to the American workers most in need. This modest, targeted action will put money directly in the pockets of American workers and generate additional incentives for work and employment, right when the money is needed most."

Important Details of Trump's Payroll Tax Deferral

Who was covered?

According to the Presidential Memorandum, "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." This equated to an approximately $104,000-a-year salary ($4,000 biweekly * 26 pay periods per year).

IRS Notice 2020-65 further clarified that the determination of total wages was made on a pay-period-by-pay-period basis, which may have disqualified the same employee in certain pay periods based on overtime wages or other bonus pay. Additionally, if an employer paid wages on a basis other than biweekly, the $4,000 threshold was recalculated as an “equivalent amount with respect to other pay periods."

Which payroll taxes were deferred?

The Executive Order applied only to the employee portion of Social Security payroll taxes (6.2%). Employee Medicare payroll taxes (1.45%), employer Medicare payroll taxes, (1.45%) and the employer portion of Social Security payroll taxes (6.2%) were not included in the Executive Order. Additionally, the deferral did not apply to the parallel Social Security taxes owed by self-employed individuals via self-employment taxes.

When was the effective date?

The employee portion of Social Security payroll taxes on wages paid during the period of Sept. 1, 2020, to Dec. 31, 2020, were allowed to be deferred without incurring any penalties, interest, additional amount, or addition to the tax. Employers who deferred these taxes would not withhold the funds or pay the taxes to the IRS as typically scheduled.

Rather, the deferred taxes were due over the time period from Jan. 1, 2021, to Apr. 30, 2021. According to the supplemental detail in IRS Notice 2020-65, interest, penalties, and additions to tax began "to accrue on May 1, 2021, with respect to any unpaid applicable taxes."

Is this Optional or Mandatory?

This guidance was optional for private-sector employers. It was likely that the administrative costs would be a deterrent for many small businesses. It took time to process changes in a payroll system, and there was additional manual tracking required to ensure specific situations were accounted for correctly.

As the United States’ largest employer, the federal government deferred employees' portion of their Social Security taxes to provide immediate relief during the pandemic. There was no option to opt-out for federal employees; and the plan was to implement these deferrals as of the second pay period in September. This included all branches of the military, as well as civilian jobs with the federal government.

This Executive Order was written as a deferral, which means the payroll taxes that are deferred by your employer now will be due at a future date. As of this writing, it is most likely that employers who choose to defer taxes from Sept. to Dec. 2020 will end up withholding double taxes from Jan. to Apr. 2021 to recoup the amount.

Because the deferred taxes from Sept. to Dec. 2020 will be taken out in Jan. to Apr. 2021, this poses specific risks to anyone planning on (or forced to) change jobs in that time frame. For example, Employer A may be deferring the employee portion of your Social Security taxes. If you leave your job in Nov. 2020 and start another job with Employer B in Jan. 2021, you may run into some issues because the deferred taxes were not able to be withheld from your paychecks from Jan. to Apr. 2021.

The supplemental IRS guidance, Notice 2020-65, issued on Aug. 28, 2020, is brief, and it did not answer all of the questions that business owners and tax professionals have about implementation. One of the issues that wasn’t answered was how employers should collect deferred payroll taxes from employees who separate from the company before the end of Apr. 2021, when deferred payroll taxes are to be fully recouped. The IRS Notice 2020-65 states that, if necessary, employers can make arrangements to otherwise collect the taxes from employees.

If you suspect that you may be in this situation, whether via a furlough, layoff, or planned resignation, you should plan for—and anticipate—repaying the 6.2% of your wages during the time period the deferral was in effect.

Criticism of the Executive Order

Critics of the executive order claimed that deferring certain payroll taxes did nothing to help those hardest hit by the coronavirus pandemic: individuals who have been furloughed, laid off, or are otherwise unemployed. Because these individuals ded not pay payroll taxes, the deferral did not affect or benefit them.

According to the House Committee on Ways and Means, the executive order "does not affect the Social Security's Trust Funds, as the taxes are only deferred." Because the tax has not been eliminated, as it will be paid back in early 2021, it should have no impact on the Social Security Trust Fund. If Congress is able to come to an agreement on legislation that allows for the forgiveness of the deferred taxes, consideration will have to be given as to how to fund the gap in the Social Security Trust Fund.