Tuesday, September 22, 2020

Employee Payroll Tax Deferral


On August 8, 2020, President Donald Trump issued a Presidential memo allowing for the deferral of certain payroll taxes. This deferral can be applied to wages beginning on 9/1/2020 and ending on 12/31/2020.

The deferral is limited only to the employee’s share of Social Security taxes during the deferral period for employees earning $4,000 or less during a bi-weekly pay period (or the equivalent threshold amount for other pay periods). However, any amounts deferred must be repaid between 1/1/2021 and 4/30/2021. In essence, the employer could stop withholding (and stop remitting) the employee portion of Social Security tax beginning 9/1/2020, but after 12/31/2020, would have to withhold (and remit) current Social Security taxes as well as any Social Security tax deferred during the deferral period.

The repayment of the deferred taxes would be withheld ratably from wages paid between 1/1/2021 and 4/30/2021. Employee take-home pay would increase for the remaining four months of 2020, but would dip below normal starting 1/1/21 due to repayment. If not all of the deferred taxes are paid by 4/30/2021, then they will start to accrue interest and penalties.

As for employers, the deferment of employee’s Social Security taxes is OPTIONAL. The employer is ultimately responsible for the withholding and depositing of the additional withholding during the repayment period. There are administrative issues in achieving the deferral and repayment, such as increased payroll fees. There is also no financial benefit to the employer, as the deferred taxes will be passed through to the employees as higher net pay. In addition, the employer may have to make up the difference out of their own pocket if an employee quits or is terminated before the entire deferral amount is repaid.

The main benefit to deferring taxes would be increased employee satisfaction due to receiving higher net pay. However, this could backfire in early 2021 if employees don’t understand that their net pay will decrease below normal due to the additional withholding due to deferral repayment.

If you would like to discuss the optional deferral of employee Social Security taxes or would like additional information, please contact us.