Should Employers Participate in the Payroll Tax Deferral?
On August 8th, President Trump signed a Presidential Memorandum to enable employees to defer paying in the social security tax withholdings on their wages between September 1 and December 31. Eligible employees are those who make less than $4,000 or less on a bi-weekly basis. Questions regarding how employers follow this directive have been growing since the announcement. On August 28th, the IRS gave guidance for employers in IRS Notice 2020-65.
The guidance spells out the responsibilities and options for employers as follows:
- Amounts of employee social security taxes withheld between 9/1 and 12/31 must be repaid between January 1 and April 30, 2021. This is to be done in addition to regular social security tax withholdings during the same time during 2021 – essentially doubling the amount of SS withholdings during this time frame.
- The employer is held responsible for ensuring that the deferred social security tax is paid. Employers will be subject to penalties and interest if repayments are not made by April 30, 2021.
- Employers can choose to offer deferral to their employees.
We now know how the directive will be administered, but it creates more questions for employers – most importantly, should your company offer this deferral election to your employees. The answer can vary from business to business. It is important to consider the following items when making the decision:
- Employers have the responsibility to pay the withheld taxes to the IRS next year.
- Any deferred taxes by the employee will increase their current take-home pay until January 1, 2021. Taxes deferred will be taken out of employee paychecks beginning in 2021 on top of social security taxes for 2021 wages, thus reducing the net paychecks of employees.
- If employees terminate employment between now and April 30, 2021 and are deferring their social security taxes, it is the employer’s responsibility to collect the deferred taxes from the employee for repayment. If it is not collected, the employer will be required to pay the deferred tax amount due by 4/30/21.
- Check with your payroll provider or software to make sure the systems are properly working to support this new option before offering the opportunity to employees.
The risks and rewards of participating in this directive should be carefully considered before employers choose to implement it to qualifying employees. Please contact a Squire Advisor to discuss your specific situation and options.
*Please note that Squire & Company is not affiliated with any political party or platform, and provides information solely based on current tax laws and regulations.