On August 13, President Donald Trump signed an executive memorandum instructing U.S. Treasury Secretary Steven Mnuchin to develop a plan to defer employees’ share of Social Security payroll tax collection in an effort to “put money directly in the pockets of American workers and generate additional incentives for work and employment[.]”
Corresponding Internal Revenue Service (IRS) guidance issued August 28 indicates employers may choose to begin executing the payroll tax deferral from September 1 to December 31, 2020, without penalty or interest. However, employees must repay all deferred taxes between January 1, 2021 and April 30, 2021. The employer may double withholdings during that period to recoup the owed taxes without penalty to the employee. Interest and penalties will begin for any outstanding taxes beginning May 1, 2021.
Although the President’s memorandum directs the Treasury Secretary to explore options to “eliminate the obligation to pay the taxes deferred,” there are no indications at this time of the Administration’s strategy to provide payroll tax forgiveness.
The federal government levies a payroll tax on all employers and employees to fund Social Security and Medicare entitlement programs. They consist of a 12.4 percent Social Security tax and an additional 3.9 percent Medicare tax on wages. The burden for paying both components of the payroll tax are divided evenly between employers and employees, with employers withholding the employee share for each pay period and then providing full payment to the IRS. President Trump’s executive memorandum only addresses the employee share of the Social Security side of the payroll tax.
Notably, the IRS guidance indicates deferring the 6.2-percent employee share for the Social Security payroll tax is optional for employers to implement. All employers – including special districts and other public employers – that withhold payroll tax for Social Security are eligible. Employers electing to defer withholdings can do so for employees earning less than $4,000 on a bi-weekly basis. This deferral can be made on a paycheck-by-paycheck basis.
Special districts should note that employers were separately granted the option to defer the employer’s 6.2 percent share of Social Security payroll tax deposits through December 31, 2020, as authorized in the CARES Act. To avoid penalties, 50 percent of the deferred amount must be paid back by December 31, 2021 and paid in-full by December 31, 2022. Click here for an IRS Q&A sheet on the employer deferral program, which is separate and apart from President Trump’s recent executive memorandum.
The impact of payroll tax deferrals on California’s special districts may be minimal, as many are already exempt from contributing to Social Security pursuant to Section 218 Agreements. CalPERS administers Section 218 Agreements on behalf of all public employers in the State of California, regardless of whether the employer is a member agency of CalPERS.