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For Employers: Treasury Guidance on Employee Payroll Tax Deferral Issued Late Friday

Late Friday the Treasury issued a three page Notice providing some guidance regarding the deferral of employee social security taxes normally withheld from employees paychecks.

The guidance still leaves questions and confusion, but here are the bullet points.

1. Employers are the “Affected Taxpayers”, not employees. This is important, because it appears to leave employers on the hook for the taxes to be ultimately paid.

2. The Notice states that Affected Taxpayers should NOT withhold the employee’s 6.2% social security tax from wages paid from September 1, 2020 – December 31, 2020. No withholding means no deposit liability is created.

3. Beginning January 1, 2021 – April 30, 2021, the Affected Taxpayer/Employer must withhold the deferred payroll taxes from the employee’s paychecks and deposit these deferred taxes with the IRS by April 30, 2021. Penalties and interest will start to accrue on May 1, 2021 on any unpaid balance.

FYI, the employer must still deposit the employer match on the deferred employee social security taxes, unless the employer has elected to NOT deposit their match under the CARES provision for employers.

This deferral program creates a significant administrative burden for employers, and a cash flow issue for employees. The employee paychecks will be smaller in 2021 due to twice the social security tax being withheld from their paychecks (deferred taxes and current year taxes) until the deferred taxes are repaid.

What if the employee leaves before the deferred taxes are repaid? No one knows for certain, but it appears that the Affected Taxpayer/Employer is on the hook for the deferred taxes to be repaid.

What if the employee cannot handle a smaller paycheck in 2021 and needs to spread the repayment over a long period? Penalties and interest run if the deferred taxes are not repaid by May 1, 2021.

Opt Out? Although the Treasury Notice does not provide for an Employer Opt Out, the professional consensus still seems to be that an employer does NOT have to participate in the employee deferral of payroll taxes.

September 1, 2020 Paydate: Payroll software may not be ready for this deferral option on September 1, as the guidance was issued so late. If you want to implement the deferral program for your affected employees, wait until your payroll software/payroll provider is ready.

Recommendation: READ the links provided below regarding how this works. Be fully informed BEFORE you decide to implement this deferral option or pass. Inform your affected employees (those making less than $4000 on a biweekly payroll) of your choice.

Please do call us if you have any questions.

https://www.forbes.com/sites/shaharziv/2020/08/28/treasury-finally-issues-guidance-on-trumps-payroll-tax-deferral-holiday-effect-social-security-defund-unclearmemo/#41d5f7c65c8f

https://www.cnbc.com/2020/08/28/irs-rules-on-trumps-payroll-tax-cut-put-firms-on-the-hook-for-taxes.html

https://www.bloomberg.com/news/articles/2020-08-28/irs-issues-guidance-for-trump-order-to-defer-payroll-taxes

https://www.irs.gov/pub/irs-drop/n-20-65.pdf

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