You may be wondering how this latest executive order from President Trump will effect your agency or your team. What do you need to do to provide this to your team members? Can you set this up in Gusto? How does this effect my agency? These are all questions our team is getting from Agents around the country. Let's dive in to find answers to your questions.
Background
On Saturday August 8, 2020, the president signed four executive orders and memorandums related to the COVID-19 pandemic. Congress has spent weeks negotiating over the next pandemic relief bill and has yet to come to an agreement. While waiting for Congress to act, the president stepped in through executive order. The legislation signed by the president includes a memo on deferring payroll taxes. This is sure to be a hot topic among employees within our clients' (insurance agents) offices around the country. Make sure you are up-to-date on the specifics of this order to make informed recommendations to your team.
How are payroll taxes impacted?
Payroll taxes typically refer to both the employer and employee share of national Social Security and Medicare funds. The executive memo signed by Trump related to payroll taxes refers only to employee Social Security taxes, which represent 6.2% of an employee's paycheck.
The executive memo states that it would defer the employee's payment of Social Security taxes between September 1, 2020 and December 31, 2020.
The maximum amount an employee can defer in this four month period is set at $2,232.
Who will be affected?
This is employee specific, as stated above. The memo states that employee Social Security taxes can be deferred, which means that employee paychecks could be (slightly) larger for the next four months.
Does any action need to be taken by the employer or employee?
The way the order is written, it appears that the employee would be able to "opt-in" for this tax deferral, and employers must honor their opt-in requests. But employers may ultimately be on the hook for paying back those taxes when due. The IRS will likely be providing more clarity on this point in the coming weeks.
Gusto, Club Capital's exclusive payroll partner, is seeking clarification on the order - as they learn more about the actions that must be taken in order to take advantage of this tax deferral, they will post updates here.
When will this go into effect?
The memo states the tax deferral will be in effect from September 1, 2020 through December 31, 2020. Within those months, qualifying employees who have elected to defer their tax payments will have an additional 6.2% in their net pay.
Who is eligible for payroll tax deferral?
In order to be eligible for payroll tax deferral, an employee must generally make less than $4,000 every two weeks (which means they must make less than $104,000 per year).
Will employees have to pay the deferred payroll taxes eventually?
YES. This is incredibly important, so make sure you understand this as both an employer and employee. If you are an employer, communicate this clearly to your employees: without further action by Congress or President Trump, it is likely that the employee's deferred payroll taxes will need to be repaid. Although paychecks will be bigger in the meantime, eventually these deferred taxes will be paid by employees.
President Trump is calling on Congress to make this tax deferral a permanent cut, but as of now, that has not happened.
Anyone who takes advantage of this payroll tax cut should be prepared to pay these taxes in 2021.
Bottom Line
Employees should be cautious about electing for the payroll tax deferral. This could very well remain as a liability for the employee that they will have to pay at a later date. Make sure employees know the details of this deferral before making a decision on whether to elect.
Quick note: this is not to be taken as tax, legal, benefits, financial, or HR advice. Since rules and regulations change over time and can vary by location, consult a lawyer or HR expert for guidance.