Payroll Tax Deferral Option Goes into Effect September 1, 2020

September 2, 2020 by Andy Graf
Copeland Buhl

President Trump issued an executive memorandum on August 8, 2020, allowing the deferral of the employee’s share of Social Security withholding for wages paid between September 1, 2020 and December 31, 2020.  The deferral is only available to employees earning less than $4,000 each biweekly payroll period.  This is a tax deferral not forgiveness.  The deferred taxes will need to be repaid beginning January 1, 2021 through April 30, 2021.  Employees would see a short-term increase in their pay now but would then have a decrease next year when they have to repay the deferral through extra withholding.  The reduction is compounded because regular Social Security withholding will restart in January. 

The IRS released guidance on August 28th stating that the liability for paying back the uncollected taxes will ultimately fall on the employers.  The IRS notice states that employers must withhold and pay the deferred Social Security withholding ratably from wages paid between January 1, 2021 and April 30, 2021, or the employer “may make arrangements to otherwise collect the total applicable taxes from the employee.”  There is no explanation of how deferred taxes will be repaid if an employee quits between now and when the tax is repaid or if the employees can’t otherwise pay the deferred taxes.  There remain many unanswered questions.   If employers were looking for clear direction from Treasury and the IRS, this is not it.

Treasury Secretary Steven Mnuchin said the payroll tax deferral would not be mandatory for employers to implement.  This was in response to comments that employers face administrative costs, uncertainties, and ultimate responsibility of remitting the deferred taxes down the road. 

This program places the burden on the employers to administer the deferral and maintain their tax obligations.  Most employers are going to say, “Why would we do this?  It’s a short-term loan to the employee but creates a large amount of hassle and potential tax liabilities for the employer.”  Many employers are choosing not to participate in this program.

If you choose to participate in this deferral program, proceed with caution.  We also recommend making it very clear to your employees that this is a tax deferral and they will be responsible for repaying the tax.

Please contact your Copeland Buhl representative with any questions.