PAYROLL TAX DEFERRAL
Boon for Employees? Burden for Employers?
Early last August, President Trump directed Treasury Secretary Steven Mnuchin to permit employers to temporarily suspend the collection of employees’ shares of Social Security payroll taxes … equal to 6.2 percent of the compensation of eligible employees. In response to the economic stress of COVID-19, the intent was to offer financial relief in the form of more take-home pay for employees for the period September 1, 2020 through December 31, 2020.
Eligible employees are those whose pretax wages or compensation during any biweekly pay period is less than $4,000. That means that an employee’s qualifying status could vary from one period to the next depending on earnings. Workers earning more than $104,000 annually are excluded from the payroll tax suspension.
During the four-month period, participating employers are to suspend withholding and not required to remit to the IRS the amount of Social Security payroll taxes that would have ordinarily been paid. Treasury Secretary Mnuchin has said he “can’t force” companies to participate, suggesting that the deferral would be voluntary, but that he hopes many companies will join in the effort.
It’s important to emphasize that this suspension of collecting and remitting Social Security payroll taxes is a payroll tax deferral … not tax forgiveness. President Trump’s order to delay the due date for payroll taxes for millions of workers includes the provision that the deferred taxes must be paid by April 30, 2021. That means eligible employees will enjoy fatter paychecks for the balance of this year … yet face the prospect of having to tighten their belts to comply with repayment in the first four months of next year.
In a nutshell, the tax is postponed for a specific period and then must be repaid.
The IRS follow-up guidance puts responsibility to pay the deferred taxes squarely on the backs of participating employers. Employers must collect and remit all the deferred payroll taxes between January 1 and April 30, 2021. This means withholding double the normal tax from employees’ pay checks during those four months … unless arrangements are made to collect the taxes due from the employee. Failure to do so results in interest and penalties that will accrue to the employer effective May 1, 2021.
Questions that immediately surface are: what if an employee refuses to agree to repayment … or leaves the company … or doesn’t earn enough to pay the back taxes? Without further clarification, it appears that the obligation to pay continues to be an employer obligation.
Employees of employers that choose to participate, may anticipate smaller paychecks next year when Social Security payroll taxes are withheld at twice the rate experienced before September 1, 2020. Alternatively, employees may be wise to set aside the extra funds received currently in a savings account to avoid high credit card debt or personal loans during the first four months of 2021.
Note 1: The President’s directive does not address Social Security tax deferral for self-employed individuals. Only employment-related taxes are included, not self-employment taxes.
Note 2: Unlike the voluntary provision for private employers, the Trump administration has refused to allow federal employees or members of the military to opt out. Additionally, employees remain liable for the deferred tax should they leave federal for civilian employment.
There are questions being raised by legislators, the American Institute of CPAs, U.S. Chamber of Commerce and others to clarify the benefits of this program to employers and employees. That said, as of this writing and in the absence of revisions by lawmakers, the above summary appears to be the facts.