Deferred Decision? What We Know About the Payroll Tax Deferral

Details continue to emerge regarding the payroll tax deferral ordered by President Donald Trump on Aug. 8, 2020. The move was made to temporarily direct more money to the American people.

The Basics

The essential details are as follows:

  • The deferral is applicable only to the employee share of the Social Security Tax.
  • Employees with compensation of $4,000 or less gross income biweekly (every two weeks) are eligible for the deferral.
  • The deferral period began on Sept. 1, 2020 and lasts through Dec. 31, 2020.
  • The repayment period for deferred Social Security taxes is Jan. 1, 2021 through April 30, 2021.
  • Penalties for unpaid amounts of the deferred taxes will begin to accrue on May 1, 2021.

The most important detail: There is no forgiveness for the payroll tax deferral. The taxes must be repaid, which essentially makes the deferral a short-term loan for employees. Forgiveness of the deferral would require a congressional action to change the tax code. We don’t anticipate that happening any time soon.

Are employers required to make this deferral?

Not as far as we can tell. The order and the IRS guidance don’t explicitly say the deferrals are mandatory. They also don’t state penalties for employers who don’t implement the deferral.

Therefore, at this point we consider the payroll tax deferral an option for employers and not a requirement.

How does repayment work?

The deferral amount is repaid during the window specified above. There is no specific guidance on how this should be done but we would assume it will be pro-rata over the period Jan. 1, 2021 through April 30, 2021.

What happens if an employee leaves the company before or during repayment?

Should the employee leave the company prior to the repayment of the tax, the IRS notice states that the employer can “make arrangements to otherwise collect” the balance of the deferral. We would assume that the easiest way to go about that would be to withhold the tax from their final paycheck.

What does James Moore recommend?

If you choose to continue withholding payroll taxes: Educate your employees on the policy. Distribute written notice that clearly states you’ve made this decision and (if possible) an explanation of why you made it.

If you decide to defer payroll taxes: Educate employees on how this will affect them. Specifically, they need to know the following:

  • Why their paychecks will increase for the next few months
  • How the repayment will look next year
  • What will happen if they leave the company before repayment is complete

The decision on whether to defer the taxes at all is a complicated one. On one hand, your employees would get a temporary boost in pay for a few months. Conversely, they’ll see the opposite once repayment is required unless forgiveness terms are established. Unanswered questions also remain about how to implement it, whether any changes in reporting are required, etc.

Therefore, we recommend that you make this decision based on your unique situation. This includes your operations, your industry and your staff’s capacity to implement deferral processes. For example, if you have a high employee turnover rate, you might have trouble collecting repayments when employees leave.

You should also discuss the options with your CPA firm. With their expertise on these matters and knowledge of your organization, they can recommend the best choice for you.

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