Deferral of Employee Payroll Taxes: What Business Owners Need to Know
A presidential executive order and additional IRS guidance
On August 8, President Trump issued an executive order allowing employers to defer withholding and payment of an eligible employee’s portion of Social Security tax. The presidential executive order directed the U.S. Treasury to defer the withholding, deposit and payment of the employee share of employee wages paid from September 1, 2020 to December 31, 2020.
Then, late Friday, August 28, the IRS issued a notice to provide guidance for the implementation of the payroll tax deferral executive order.
Summary of the effects of the payroll tax deferral
Payroll tax deferral is available to all employers, however, implementation is totally optional
The IRS notice indicates that all employers required to withhold employee Social Security taxes are affected by the payroll tax deferral and that the due date for the withholding and payment of employee Social Security taxes on applicable wages is postponed for those employers until the period beginning January 1, 2021 and ending on April 30, 2021.
Implementation is NOT mandatory. Please note that the notice does not require employers to stop withholding the employee share of Social Security tax on eligible employee wages, and there are no penalties on employers that opt out of the payroll tax deferral. Therefore, the deferral is fully at the option of the employer.
Deferral only applies to wages that are less than $4,000 biweekly or equivalent amounts in other periods
The IRS notice indicates that applicable wages is wages or compensation paid to an employee during the period from September 1, 2020 through December 31, 2020.
However, the notice limits applicable wages or compensation to wages or compensation that are less than $4,000 bi-weekly, or the equivalent threshold amount with respect to other payroll periods (weekly of $2,000, semi-monthly of $4333.33 or monthly of $8,666.67.)
Record keeping could be difficult. Determination is made on an employee-by-employee basis and a pay-period-by-pay-period basis. If the amount of pay is over this amount, no deferral is allowed for that pay period for that employee. However, if in a different pay period, the employee wages are less than the applicable amount payroll tax deferral would apply.
Deferred tax amounts must be withheld ratably from employee wages paid between January 21, 2021 and April 30, 2021.
The applicable payroll taxes are deferred and not eliminated.
The IRS notice requires employers that defer withholding of employee Social Security taxes to recoup the total amounts deferred as withholdings from employee wages paid from January 1, 2021 to April 30, 2021. The total recouped amount must be paid by April 30, 2021. Failure to pay the recouped amount by April 30, 2021 will result in interest, penalties and additions to tax on the unpaid amounts.
What to consider when deciding whether to defer payroll taxes
- Employees get a temporary net pay increase – Deferring the withholding of employee’s Social Security taxes will temporarily increase an affected employee’s net wages between now and the end of 2020. However, due to the recoupment, next year there will be less net pay beginning in January 2021. The result is essentially a four-month interest free loan to the employee.
- Employers have additional payroll tax administration and paperwork – Employers would need to track each employee’s wages during each pay period from now until the end of the year to determine if the wages qualify or not. Also, the employer could possibly owe the deferred FICA taxes if the employee leaves before the taxes can be recouped from tax withheld in 2021, including possible penalties if the tax is not paid on time.
Perhaps a better option for employers is to take advantage of the CARES Act provision allowing for the deferral or the employer portion of the FICA tax: one half deferred until December 31, 2021 and the other half deferred until December 31, 2022.
Be sure to contact your Herbein tax consultant if you have questions or need assistance with these rules. For additional information contact the author at firstname.lastname@example.org.