Payroll Tax Deferral Considerations

by Megan Hiles
Photo of two folders, with labels on their spines, one says "over time", and the other says "Reg Time"

On August 8, 2020, President Trump signed an executive memorandum calling for a payroll tax holiday for Americans making less than $104,000. This results in a deferral of the employee portion of the social security taxes owed between September 1, 2020, and December 31, 2020.

On Friday, August 28, the IRS released further guidance.

When weighing your options, it’s important to note that this is not a tax cut but a deferment.

This means that the tax will still need to be paid in 2021. President Trump has, however, vowed to forgive the liability pending his re-election in November. Still, given the uncertainty, this could leave the employer AND the employee with a more considerable tax liability in 2021.

Considerations for employers

According to the guidance issued by the IRS, employers must pay all deferred taxes between the period of January 1, 2021, and April 30, 2021. Employers will need to withhold the deferred taxes from wages/compensation during this period, along with the usual amounts and remit. Interest, penalties, and additions to tax will begin to accrue on unpaid taxes starting 5/1/2021.

The deferral applies to any employee whose pre-tax wages or compensation during any bi-weekly period is generally under $4,000. Determination of applicable wages is made on pay-period-by-pay basis.

As it stands today, the burden is placed on employers to collect any taxes due after the holiday ends.

This deferral program should not be confused with employers’ voluntary deferral of social security under the CARES Act from earlier this year.

Considerations for employees

For employees, it’s essential to know what your paycheck could look like at the beginning of next year. Employees could see their paycheck hit for 12.4% in social security taxes for all Q1 to make up for the deferral.

Remaining Concerns

Although the IRS has released additional guidance, we still have many unanswered questions before making a rigid recommendation.  In addition, we still have yet to hear from our payroll provider partners on how they will handle this situation.

We hope to receive further guidance on issues such as what happens if an employee quits, gets fired, or laid off, and there are insufficient funds from their last payroll to cover the amount deferred. Additionally, at this moment, there is no guidance on if an employer chose to opt-out of this program, then subsequently, the deferral is forgiven. We will keep you updated when any new guidance is issued.