Employee Payroll Tax Deferral

Employers are still grappling with the decision of whether to opt-in to the payroll tax deferral for employees or to continue to collect and remit these taxes. On August 8, 2020, President Trump signed an Executive Order, deferring the Social Security portion of the federal employee payroll taxes from 9/1/2020 through 12/31/2020. At that time, employers and payroll processers were hopeful that the IRS and Treasury Department would offer clear cut guidance on how this deferral would be handled.

Late on 8/28, bare bones guidance was issued by the IRS, making a few points clear:

  • This is a voluntary program for employers, in as much as there are currently no penalties for not participating.  This could change in the future.
  • The taxes not collected for 4th quarter 2020 will be collected and remitted to the IRS in the 1st quarter of 2021.  This is to be done by doubling the tax for that period.
  • The employer, not the employee, is liable for the unpaid payroll taxes.  This means arrangements should be made to withhold uncollected taxes from an employee’s final check if they depart before the deferral has been repaid.

There are still a lot of unanswered questions.  GO’s takeaways:

  • Employees should know that this is a deferral and not forgiveness, and that their taxes will double for Q1 2021 if they defer now.
  • Employees don’t necessarily have a choice to make the deferral if the employer chooses not to participate.  We also don’t know if it will be possible to allow some staff to participate and allow others not to.
  • Currently many payroll systems, have not updated their software to allow for the deferral, making it impossible until it is changed.

There has been some mention of forgiving this quarter of taxes, however, that would take an act of Congress, which seems unlikely at this time. It is unclear whether those employees whose companies choose not to participate will be able to recoup those taxes upon an act of forgiveness.

While federal employees are having this tax deferred automatically, most employers outside the government are opting out of this deferral, since it presents a significant administrative burden, and also will effectively double the tax that employees pay in the first quarter of 2021.

As of now, we consider the most prudent strategy is to collect the taxes and remit them as usual, until further guidance becomes known. Each employer needs to choose to participate, based on their specific situation and the risks involved. As with all items related to employees and their pay, it is key to communicate your decision with your staff. It may also be prudent to let them know all the things that are currently unknown about this deferral and that the company policy may change with further guidance.

Image attribution: Shutterstock By Blue Planet Studio

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