No Guidance Yet on Payroll Tax Deferral

No Guidance Yet on Payroll Tax Deferral

Nearly three weeks after President Donald Trump issued a memorandum deferring payroll tax collections, the Internal Revenue Service (IRS) still has not issued guidance for employers. The tax holiday is scheduled to begin September 1, but many employers insist they need additional guidance on implementation.

On August 8, the president directed the Secretary of the Treasury to suspend collection of payroll taxes for employees who make $104,000 or less a year. The memorandum set a time frame of September 1 through December 31, although it did not necessarily require employers to suspend employee withholdings.

Deferring payroll tax collections would increase employee take-home pay, but employees would still have to pay their deferred tax liabilities unless Congress passes a permanent halt that aligns with the executive action. Thus far, Trump’s payroll tax holiday proposal has received little congressional support. The 6.2% payroll tax goes directly into the Social Security Trust Fund.

ADP, a large payroll processing firm, advised congressional and administrative officials that a transition as outlined in the memorandum normally requires six months or more to implement. Several details remain unknown:

  • Should the measure be an option for employees?
  • How should workers elect to defer or not?
  • What happens if an employee does not choose?
  • Can the employer continue to collect withholdings but escrow it in case the tax holiday becomes forgivable?
  • What happens if an employee leaves and the deferral is not forgiven?
  • Must employers maintain separate records during the time period?

KLC has received numerous questions from city officials regarding the payroll deferral and related guidance. Until the Treasury Department issues guidelines, most cities cannot implement the payroll deferral. Even after guidelines are issued, it will take time for cities to implement due to the complexities involved in any payroll change. There are no penalties for noncompliance, but city officials will be left with the difficult task of explaining to municipal employees why the deferral will not go into effect on September 1, 2020.

Treasury Secretary Steven Mnuchin has said he cannot force employers to comply with the memorandum, but he hopes they will do so.