Employers Should Approach Payroll Tax Deferral Cautiously

 

• Learn more details about the pros and cons of the payroll tax deferral.
• Discover employer options regarding the postponement.
• Find out about unforeseen, and possibly detrimental, consequences of the postponement for employees.

As you’re probably aware, President Trump signed an executive memorandum on August 8 creating a payroll tax deferral. The development has brought with it much uncertainty regarding administrative compliance and the long-term impact of this pandemic-related relief. Fiducial has the information you need about this payroll tax deferral below.

Payroll tax deferral details

Under the memorandum, an employer may choose to postpone withholding, deposit, and payment of the employee’s share of Social Security tax (6.2%) on wages paid from September 1, 2020, through December 31, 2020. The wages in question must equal less than $4,000 on a biweekly pay period basis or an equivalent amount in other pay periods. The memo determined the threshold on a pay-period-by-pay-period basis.

The IRS recently released Notice 2020-65, which postpones the withholding and remittance of the employee’s share of Social Security tax ratably between January 1, 2021, and April 30, 2021. Penalties, interest, and additions to this payroll tax deferral will begin to accrue on May 1, 2021, for any unpaid taxes. The Notice states that, if necessary, an employer may arrange to collect the total applicable taxes from the employee.

Your decision

This payroll tax deferral and the remittance of the employee’s share of Social Security tax is optional. You may ask for input from employees about their desire to participate but you do not have to. You may permit employees to opt in or opt out of the postponement at your discretion. Recent guidance does not address the issue.

An IRS spokesperson has explained that Form 941 is being revised for the third quarter of 2020. This form will report postponed taxes for employers who elect to participate in the payroll tax deferral. The IRS will release the final Form 941 in late September for filing in October.

The Notice permits employers who have elected the postponement to begin withholding the employee’s share on January 1, 2021. However, such withholding may have unforeseen and detrimental consequences. Specifically, unless Congress passes a law to forgive the deferred taxes, employees will end up receiving less in take-home pay in the first four months of 2021. And many workers will have a problem with that.

Further developments

With so many questions remaining, employers should proceed carefully when deciding whether to opt for the payroll tax deferral. The IRS has stated that, regardless of whether employers recover the amounts from an employee, the employer will remain liable for the employee’s share and must remit the postponed withholding of the employee’s share of Social Security tax by April 30, 2021.

However, if you choose to elect the postponement, it’s a good idea to provide a notice to employees that clearly states that the employee’s share of Social Security is postponed until December 31, 2020. Furthermore, withholding for these amounts will occur ratably between Jan. 1, 2021, and April 30, 2021. That extra withholding will be in addition to employment tax withholding otherwise required on wages for January through April 2021.

Need more information on the payroll tax deferral? Call Fiducial at 1-866-FIDUCIAL or make an appointment at one of our office locations. Ready to book an appointment now? Click here. Know someone who might need our services? We love referrals!

For more small business COVID-19 resources, visit Fiducial’s Coronavirus Update Center to find information on SBA loans, tax updates, the Paycheck Protection Program, paid sick and family leave, and more.