Employees Can Defer Certain Payroll Tax Obligations
To defer or not to defer, that is the question
On August 8, 2020, the President of the United States signed four Executive Actions including a Presidential Memorandum that provides for the deferral of certain payroll tax obligations for certain employees from September 1, 2020, to December 31, 2020.
On August 28, 2020, the Secretary of the Treasury released Notice 2020-65 and Information Release 2020-195, implementing the Executive Order by “allowing” employers to defer the withholding and payment of an employee’s share of Social Security tax for employees with a bi-weekly payroll of less than $4,000, or an equivalent amount with respect to other pay periods. The notice does not eliminate the obligation to withhold and remit the payroll tax, but merely defers withholding and payment until next year.
This payroll limit is determined for each paycheck separately. Thus, receipt of a bonus in one period could mean that the deferral would not apply for one pay period, but would apply for other pay periods during the four-month period.
The deferred withholding and payment of these taxes must be made between January 1, 2021, and April 30, 2021. If the deferred taxes are not paid on or before April 30, 2021, penalties, interest and additions to tax will accrue beginning May 1, 2021.
“This defers up to $2,000 for each employee from September through December 2020 only to have it paid back to the IRS in January through April, 2021 while still having regular payroll taxes withheld.”
What does this mean for employers?
Because the deferral is voluntary, employers must decide whether or not to defer the withholding and payment of the employee’s share of the Social Security tax. Compliance with the deferral option can be difficult as systems must be reprogrammed for the period of deferral and the period of payback.
In determining whether or not to provide this new benefit to employees, an employer must consider that the deferred tax is an obligation of both the employer and employee. Additionally, certain employees of the employer may be personally liable for the payment of the deferred tax.
If an employee terminates employment before January 1, 2021, and before the deferred tax can be withheld, there is a concern that the employer (and responsible parties employed by the employer) would be liable for these taxes. According to the guidance, an employer “may make arrangements” to otherwise collect the total deferred taxes from the employee. Employers may want to discuss with their attorneys the benefit of a legal obligation to repay tax should an employee terminate employment without the taxes being withheld.
Another consideration for employers may be the impact of appearing to increase and then decrease employee wages over the next eight months. Additionally, the option to defer tax can only be provided to employees whose wages for a bi-weekly pay period are less than $4,000, or an equivalent amount with respect to other pay periods. As a result, not all employees may be able to benefit equally. By implementing this deferral, some employees may appear to be getting a raise while others may not. Those employees whose withholding was deferred may then appear to get a pay cut in 2021 when the current and deferred taxes are collected.
Yet another consideration for employers is that the Executive Order directs Treasury to “explore avenues, including legislation, to eliminate the obligation to pay the taxes deferred.” It is certainly not clear whether legislation will be enacted before 2021 that accomplishes this and, in the event that such legislation is enacted, whether the relief will apply only to employees whose taxes were actually deferred or if legislation would apply to a larger population of employees.
Cherry Bekaert is available to discuss this employee tax deferral opportunity with you and help you determine if it is the right choice for your company.
Cherry Bekaert Insight
As the benefit seems to be fairly minimal and the administrative burden fairly significant, many employers are opting not to pursue this voluntary program. A prudent course may be to wait and see what further developments occur.