Payroll Tax Deferral Update – Social Security Tax for Employees

Update as of 8/31/20

Late Friday afternoon, the IRS released guidance on the Payroll Tax Deferral related to the employee portion of Social Security taxes initially announced on August 8th.

The guidance was delayed as the White House looked into ways to waive the worker’s taxes entirely rather than deferring until next year. Only Congress has the power to waive taxes so the taxes are only deferred for now. 

Thankfully, they gave us all plenty of time to get this in place. Oh wait, is tomorrow September 1st?? Nevermind. Well, let’s get to work with what we have. 

The Short Recap of the Payroll Tax Deferral Update

Employers have the option to allow employees who make $2,000 a week or less to opt-out of withholding their employee portion of Social Security (6.2% of their check) from September 1st until the end of 2020. This money will then need to be paid back between January 1st and April 31st, 2021. There is no specific guidance on how it will be repaid yet. 

It is up to the companies whether they will opt into the payroll tax deferral.

If companies opt-in to the program and stop withholding taxes for employees starting September 1st, the taxes will be deferred until December 31st. Starting in January, companies will withhold taxes from paychecks in larger amounts so employees can pay back what they owe.

Who is Responsible to Pay the Deferred Taxes? 

Per the IRS: An employer remains responsible to collect and remit any deferred taxes. An employer must withhold and pay the total taxes due that the employer deferred under this notice ratably from wages and compensation paid between Jan. 1, 2021 and April 30, 2021 or interest, penalties, and additions to tax will begin to accrue on May 1, 2021, with respect to any unpaid taxes. If necessary, the employer may make arrangements to otherwise collect the total taxes from the employee.

Guidance from our HR Guides

It appears that it will be your choice as an employer whether or not you want to allow your employees to defer these taxes. This is a decision that has pros and cons but either way you should be prepared to discuss the program with your employees. Don’t forget to watch the initial overview for a better understanding of this program. 

Think about the impact it will have on both you and your employees prior to making a decision. 

There will be a substantial change to how you collect, pay, and file taxes for your employees if you are to opt-in. You must measure the positive impact of the additional “cash in hand” for your employees and their desire to participate as part of your decision making criteria in addition to the burden it places on you as an employer. 

What is ERG Doing to Help You?

We are continuing to monitor the details as they come out since there are still several holes in the administration of the program. Expect more communication this week. Be sure to signup for our email notifications to get the most up-to-date information from our HR Guides.

Other Details Regarding the Payroll Deferral Tax Update

The determination of Applicable Wages is made on a pay period-by-pay period basis. 

If the amount of wages or compensation payable to an employee for a pay period is less than the corresponding pay period threshold amount, then that amount is considered Applicable Wages for the pay period, and the relief provided in this notice applies to those wages or that compensation paid to that employee for that pay period, irrespective of the number of wages or compensation paid to the employee for other pay periods. 

In other words, if someone made less than $2,000 for a week during one pay period, that period would be eligible to defer the social security tax even if they normally make more.

Payroll Tax Deferral Executive Order

Keep in mind that this is a deferral and nothing in the memorandum explicitly forgives this amount nor can it without an act of Congress. It does specifically state that amounts deferred will not be subject to penalties, interest, additional amounts, or additional tax.

Employers, meanwhile, have had the ability to defer payment of the employer share of the Social Security tax (6.2%) paid since the passage of the CARES Act in April. The law allows such payments over a two-year period – with half due by Dec. 31, 2021 and the other half due by Dec. 31, 2022.

It’s unclear what happens if employees stop working at their companies before the end of April, either because they have quit or have been furloughed. The IRS guidance says companies can “make arrangements to otherwise collect the total applicable taxes from the employee.”

The answer from the Internal Revenue Service was no, employees are still on the hook for paying their taxes next year. 

Stay tuned for more from us over the coming days!