COVID Regulatory and Tax Updates
What Businesses Need to Know About Payroll Tax Deferral
- The deferral does not appear to be mandatory.
- The employer is ultimately responsible for withholding and depositing the deferred tax.
- Employees will see higher wages paid throughout the end of the year, but there may be challenges in administering the deferral.
Have questions about the payroll tax deferral?
On August 8, 2020, President Trump issued a presidential memorandum directing the secretary of the treasury to defer the withholding, deposit, and payment of certain payroll tax obligations. Employees can defer paying their share of Social Security tax on applicable wages paid from September 1, 2020 through December 31, 2020. Any Social Security tax deferred for this period would be subject to an additional withholding amount from the employee’s paycheck from January 1, 2021 through April 30, 2021.
The Treasury issued additional guidance on August 28, in IRS Notice 2020-65. This notice answers some questions regarding the deferral of employee Social Security tax, but is silent on critical issues. The U.S. Chamber of Commerce has stated that many employers will likely decline to implement a deferral, choosing instead to continue to withhold and remit to the government the payroll taxes required by law.
Which employees are eligible to defer?
- Any employee whose gross earnings are $4,000 or less on a bi-weekly payroll or $4,333 on a semi-monthly payroll.
- The above limits appear to be a “cliff,” meaning if gross earnings for that specific payroll period exceed the threshold amounts then none of the employee wages are eligible for deferral.
- Deferral of the employee share of Social Security tax results in an increased amount of take-home pay.
- The deferral is not a suspension of the payroll tax, and an employee will have twice as much Social Security tax withheld for the period January 1, 2021 through April 30, 2021 (assuming that pay remains the same).
Other than the employee goodwill that is created by not withholding the employee Social Security tax, the notice provides many burdens and uncertainties for the employer:
- The deferral does not appear to be mandatory but the employer must bear the burden of administering the deferral, including increased fees from payroll processing companies and increased risk of errors due to the deferral.
- The employer is responsible for withholding and depositing the additional withholding that occurs January 2021 through April 2021.
- If an employee leaves or is terminated and his final paycheck does not cover the remaining outstanding deferred payroll tax related to that employee, it appears the employer will have to make up the difference.
Is deferral mandatory?
The notice is silent on that issue. Since the notice is silent and there are no penalties that could apply if employers continue to withhold payroll taxes following normal procedures, the deferral does not appear to be mandatory. If an employer does not opt into the deferral, it would be prudent for the employer to consider communicating with employees why the employer has chosen not going to defer (e.g., disruption of processes, risk of errors from changing procedures, cost of modifying computer programs for a temporary period).
Payment of the deferred applicable taxes
- An employer must ratably withhold and pay from wages and compensation paid between January 1, 2021 and April 30, 2021 the total applicable taxes that the employer deferred under this notice. Otherwise, interest, penalties, and additions to tax will begin to accrue on May 1, 2021, with respect to any unpaid applicable taxes.
- If necessary, the employer may make arrangements to otherwise collect the total applicable taxes from the employee.
What if an employee quits or is terminated?
The notice does not specifically address what happens if an employee’s employment is terminated before the deferred Social Security tax is recovered. The notice says “if necessary, the affected taxpayer may make arrangements to otherwise collect the total applicable taxes from the employee.”
This should mean the employer may withhold the appropriate amount of Social Security taxes from the last paycheck for an employee who is no longer employed. It also appears to mean that if the employer fails to withhold sufficient Social Security tax from the employee, the employer is responsible for the shortfall. For example, the final paycheck for a departing employee may be insufficient to fully satisfy the employee’s obligation for the employee share of Social Security tax.
Should organizations implement the deferral?
Review the advantages and disadvantages of the deferral. The advantage is employees receiving applicable wages should see higher net paychecks paid through the end of the year.
The disadvantages or challenges, however, are significant. The challenges include difficulties in administering the deferral, the greater financial burden that will be placed on employees next year, the short-term nature of the deferral (i.e., a four-month deferral), and the risk the employer may not be able to recoup the deferred amount from those employees who quit or are terminated before the entire amount of deferred taxes is collected.
How we can help
CLA is here to help you and your business navigate changing regulations and rules. Please reach out to your CLA advisor for guidance regarding how these developments could impact you.