cash money after payroll tax deferral

IRS Issues Payroll Tax Deferral Guidance – What You Need to Know

Given the sparse guidance, there is currently a lot of leeway in how employers can implement the tax deferral holiday.

On August 8, 2020, President Trump declared an optional payroll tax deferral holiday for the employee portion of social security taxes. The IRS issued guidance for employers to implement the deferral program on August 28, 2020. While the policy could result in a temporary net pay boost for employees, the policy is fraught with peril for both employees and employers. Here is what you need to know:

Who is eligible for payroll tax deferral?

Any employee who makes less than $4,000.00 in a bi-weekly pay period is eligible for deferral of the 6.2% social security payroll tax. This can up to a $248.00 increase in net pay in a bi-weekly pay period.

What is the deferral time period?

The deferral period is for all payroll paid between September 1, 2020 and December 31, 2020.

Will the payroll tax deferral be forgiven?

It is important that employees and employers understand that this amount is deferred, not forgiven. All taxes deferred must be repaid through payroll deduction between January 1, 2021 and April 30, 2021.

Do all employers need to participate?

The program is optional. Employers do not have to participate. The IRS guidance is clearly aimed at employers, not employees.

Who is responsible for repayment?

The burden of paying deferred taxes in 2021 ultimately falls on the employer. While the IRS clearly states that the employer can make arrangements to withhold the deferred taxes from the employee upon separation, at the end of the day, if the employee does not pay the deferred taxes, the employer will be liable for them, and any associated penalties and interest if the deferred taxes are not repaid by April 30, 2021.

Employers and their human resources departments may want to take some of the following steps:

  1. Clearly communicate your policy regarding the tax holiday to your employees, even the ones who don’t qualify for the deferral.
  2. If your company participates, make sure the employees understand the following:
    a. The deferral may be helpful in the short term, but will result in additional withholding, absent action by Congress, in 2021. The employee may see withholding at double the current rate in 2021, which may result in future hardship.
    b. Should the employee separate from service before all deferred taxes are repaid, the employer will withhold all remaining deferred taxes from the final paycheck.
    c. Theses concepts should definitely be acknowledged by the employee in a written or electronic manner.

Employers need to be aware that they could be exposed to up to approximately $2,150 per eligible employee for unpaid payroll tax deferrals.

The big question is whether, if Congress acts and forgives the deferred payroll tax, whether it will direct the US Treasury to issue refunds to all employees whose payroll taxes were remitted, direct employers to issue the refund, and credit the amounts against 2021 payroll taxes due, or undertake some other method to put the money back in the employees’ pockets. These are issues to be aware of, but there are no specific ways to plan for these speculative policy outcomes, except to keep abreast of all changes.

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