On August 8, 2020, the White House issued the Memorandum on Deferring Payroll Tax Obligations in Light of the COVID-19 Disaster. Although the IRS issued some guidance on the memorandum on August 28, there remains many unanswered questions surrounding the mechanics of the deferral and repayment.
The central idea of the notice is to allow employers to defer withholding the 6.2% employee portion of social security taxes. The deferral period is on wages paid from September 1 through December 31, 2020. Any deferred taxes must be collected from the employee’s wages ratably from January 1 through April 30, 2021. Any amounts unpaid by May 1, 2021 will accrue interest and penalties.
The deferral does not apply to all workers. Only employees earning $4,000 or less in a biweekly pay period are eligible for the deferral. For employees whose pay fluctuates, the $4,000 limit is applied on a per-pay-period basis. For employer’s who do not pay on a biweekly basis, the IRS guidance allows for an “equivalent threshold amount with respect to other pay periods”. In addition, the tax deferral only applies to social security and Railroad Retirement taxes. It does not apply to a self-employed person’s self-employment tax.
The deferral of the tax withholding is at the discretion of the employer, not the employee. Therefore, although the president has postponed the due date of these taxes, it cannot require the employers to use the extended deadline. An employer who doesn’t wish to defer such taxes, can continue to withhold employee taxes using the normal method and pay using the normal schedule.
There is uncertainty regarding the tax liability when an employee terminates employment prior to the recoupment of the deferred taxes. It appears that the employer would be subject to the repayment of the liability. Employers who choose to defer the taxes should put safeguards in place to protect themselves against having to pay the tax or the repayment penalties. For instance, the employer could require employees to sign a statement permitting the final paycheck to be used to repay any outstanding liability.
There is no guidance yet regarding whether an employer can elect to defer the tax on a select group of employees, but not all employees. The ability to decide which employees will be granted the deferral would be another way that an employer could provide some protection to itself by only deferring taxes for the more trusted, longer-term employees.
President Trump has made it clear that he would like the deferral to become a tax waiver. However, it would take Congressional action to convert the deferral to a waiver. Considering that both parties opposed earlier payroll tax relief proposals, this appears unlikely.
Finally, the employee who has his or her social security taxes deferred until next year will see slightly larger paychecks through the end of 2020. However, the double-deduction that will occur in 2021 (if a tax waiver is not passed) will result in smaller paychecks and very likely result in many unhappy employees.
The social security tax deferral is a complicated issue which will require additional payroll record-keeping for any employer electing to abide by the terms of the notice. It should not be entered into without looking at all the facts and uncertainties involved. Please call our office with your questions.
By Cheryl DeVoe, CPA
- This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.