Considerations for payroll tax deferrals: Know before you decide

By Nick Annan

On August 8, 2020, President Trump signed a memorandum directing the Treasury Secretary to defer the withholding, deposit, and payment of employee Social Security taxes for wages paid beginning September 1 through December 31, 2020 on any employee paid less than $4,000 on a biweekly basis. This memorandum relates to the 6.2% Social Security tax on wages and does not affect the 1.45% Medicare tax. The order further directs the Treasury Secretary to explore options to eliminate the obligation to repay the deferred taxes.

The IRS subsequently issued notice 2020-65 which clarifies that employers deferring under this memorandum must withhold and pay the total applicable taxes that were deferred ratably from wages and compensation paid between January 1, 2021 and April 30, 2021, or interest and penalties will begin to accrue on May 1, 2021.

It is key to note that this is currently a deferral of payroll tax and not an exemption. It is optional for the employer; whether an employee is allowed to opt out of deferral if the employer opts in is uncertain and requires further guidance.   Further, if an exemption from the deferred payroll tax is not secured through legislation, an idea that has received bipartisan rebuke, this boondoggle would force employers to double the normal withholding amount for January through April 2021. Employers are on the hook for the deferred tax, so if an employee leaves before the back tax is collected, the employer will have to pay for the deferred tax.

What should you keep in mind regarding this program?

  • Do you have high employee turnover? If employees leave before the back tax is collected then the employer will be responsible for those tax payments.
  • Is your payroll department or third party payroll vendor prepared to implement? With ambiguous guidance, even large national payroll vendors are unprepared on September 1, 2020 to implement this program.
  • If employees are allowed to opt in or out, is your human resources team prepared to have one-on-one conversations with each employee? You may want to clarify expectations regarding potential repayment of the deferred tax with signed agreements. This could be an intensive drain on resources.
  • Will your employees understand the potential for double withholding in 2021? Make sure they understand that the tax will still be collected between January 1, 2021 and April 30, 2021.
We Can Help

This payroll tax deferral program still has many unanswered questions which makes implementation and execution difficult. Communication and planning will be crucial for both you and your employees. If you plan to participate, contact Elliott Davis. We can facilitate conversation with your payroll provider and labor law attorney to support you reaching your desired outcomes.

Additional information can also be found at our most recent tax alert.

 

The information provided in this communication is of a general nature and should not be considered professional advice.  You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change as a result of rapidly evolving legislative developments and government guidance.