Remember the payroll tax deferral for employers we talked about a few months ago? In early August, President Trump signed a few executive orders to help people who are struggling financially, including payroll deferrals for employees. The Order says employees can defer some payroll taxes that the government collects to fund Social Security. The idea is that a reduction or elimination of the FICA tax would allow for more wages to pass through to employees, thereby providing more spending ability; however, it would only provide a benefit to individuals who are employed at a time when millions are unemployed.

On August 28, the Internal Revenue Service (IRS) released some new guidance on how things will work. Beginning today, companies can postpone withholding these social security taxes until the end of 2020.

What Employers Need to Know

The amount of any deferral is limited to social security taxes on wages of $4,000 or less per bi-weekly pay period.  This limitation is to be applied on a pay-period-by-pay-period basis and pro-rated (i.e. $2,000 wage limit for weekly pay and $4,333 wage limit for semi-monthly pay).

Although not expressly stated, employers are not required to allow employees to take advantage of the deferrals. If an employer allows its employees to defer the tax, it would need to begin paying the four months’ worth of FICA taxes beginning January 1, 2021, through April 30, 2021 – which essentially doubles the amount of withholdings. If deferred taxes are not repaid during this period, interest, penalties and additions to tax will accrue beginning May 1, 2021.

The updated guidance does not specifically address employer liability, however, based on other current laws, it is presumed that the employer would be required to pay the tax on behalf of any employee who takes advantage of the deferral and then doesn’t later pay it back. Employers may be able to mitigate some of this risk by retaining amounts from any final pay of departing employees.

The tax cannot be eliminated without an act of Congress, who isn’t showing much support with the temporary elimination already. That said, the President’s order directs The Treasury to explore options for the deferred taxes to be eliminated completely.

At this point, it is questionable whether employers will take advantage of the deferral, given the likelihood that it will result in a large payment of taxes at the beginning of 2021.

What Employees Need to Know

If your employer opts-in, your paycheck could be higher for a few months, but it’s only temporary –these taxes are only being deferred through the end of the year, not forgiven. Meaning this short-term ‘raise’ could feel more like a cut come 2021 when any deferred taxes will have to be repaid.  While a payroll tax holiday might be nice for your bank account now, consider your higher paycheck as a loan, not a gift, and set aside whatever you can afford not to spend in the short term for repayment next year.

Questions Still Unanswered

Numerous questions remain, as well as how much effect on the economy the deferral will actually have, considering that the taxes will eventually need to be repaid.

  • It is unclear how employers should handle a deferral in the case of job changes, as well as whether they would be able to recover the deferred taxes. (Although the employee ultimately remains liable for their own taxes.)
  • Would the deferral need to be extended to all employees under the $4k per bi-weekly pay threshold – or can it be implemented on a case-by-case basis?
  • If the employer elects to offer deferral, can employees opt-out and have the payroll taxes withheld in the normal fashion from their paychecks? If so, how / when would the taxes be remitted by the employer?

Payroll tax relief has been on the White House wish list for months as a form of economic stimulus, and there were discussions that it could be incorporated into the next stimulus package.  With stimulus legislation stalled, we are left for now with the Executive Order and limited guidance from the Treasury.

We are closely monitoring developments and will keep you updated as the situation progresses.

About the Authors

Cindy H. Mitchell
CPA
Senior Manager, Taxation Services

Subscribe

Stay up-to-date with the latest news and information delivered to your inbox.

Subscribe Now