Employee Payroll Tax Deferral

As you know, President Trump signed an Executive Order to allow the deferral of employee tax obligations on August 8. That Executive Order is now in effect and the IRS has provided guidance on the deferral and how the repayment is to be made.

The IRS guidance provides key details on employee eligibility, the repayment period, and employer responsibilities. But there are a few questions that remain unanswered, even as the deferral option takes effect September 1. Strong consideration as to this optional benefit for your employees is suggested as it could cause an economic hardship for many employees while exposing you the employer, to a difficult to manage liabilities.

Specifics of the Employee Payroll Tax Deferral

The IRS guidance specifies that any employer that currently withholds and pays the employee share of Social Security tax (6.2%) is eligible to defer this tax as specified disaster relief. The employer would be able to defer withholding and payment of employee’s share of social security tax on eligible wages during the period Sep. 1, 2020 through Dec. 31, 2020.

Which Wages are Eligible?

Eligible wages in the IRS guidance means wages or compensation paid for a bi-weekly pay period that are less than $4,000. This deferral can be made on a pay period-by-pay period basis. For example, if an employee’s bi-weekly pay during a specific period is less than $4,000, then the employee is eligible to defer the SS tax for that pay period. If in a later pay period the employee’s pay is greater than $4,000, then the employee would not be eligible to defer the SS tax for that pay period. Each pay period is considered separately, and an employee’s amount of eligible wages in a previous or succeeding pay period has no effect on eligibility.

Repayment of the Deferred Employee Payroll Taxes

Beginning Jan. 1, 2021, employers would be responsible to begin a repayment schedule for any deferred amounts of employee payroll taxes. Specifically, employers must withhold and pay back each employee’s deferred payroll taxes prorated, from the employee’s wages over the four-month period beginning Jan. 1, 2021, and completing the payback by April 30, 2021.  This means that employees will be required to not only pay back the deferred amounts of SS tax, but also pay the current taxes for that pay period.

Important: If the employer fails to withhold and remit the tax payments, penalties and interest could begin to accrue.

Are Employer Required to Offer this Deferment?

Employers can choose whether they want to offer this payroll tax deferral to their employees. However, the IRS guidance does not specify whether individual employees can opt out, but it also does not include language that employees cannot opt out. Further guidance on this is needed.

Concerns for all Employers

For Employees: Without clarifying legislation and possible action to forgive these deferred taxes, employees will be paying double SS taxes during the repayment period. This could cause an economic hardship for many employees, especially if employee wages fluctuate over each pay period.

For Employers: Employers that participate in the program may also risk exposure to contingent liabilities related to the repayment of deferred payroll taxes. In situations where employees separate from service or otherwise no longer earn sufficient wages during the repayment period, employers may be left holding the bag. Consequently, employees may use this loophole to quit or change jobs after year-end in order to avoid the repayment and subsequent drop in their wages. THERE IS NO SAFE HARDBOR FOR EMPLOYERS; the employer is obligated to repay the deferred taxes WHETHER OR NOT THE EMPLOYEE IS THERE TO REPAY.

Is this Plan Right for You?

Whether this deferral plan is right for you or your employees is an individual business owner’s choice. Infinium is here to support you with the proper administrative action should you decide to allow this deferral to be available to your employees.

We are hoping for further guidance on this, but if you have any questions in the meantime, please don’t hesitate to contact us Infinium at info@infiniumhr.com.