On August 8, 2020, President Trump signed an Executive Memorandum that entitled employers to defer the withholding, deposit, and payment of employees’ portion of Social Security tax for beginning on September 1 through the end of the year. Employees who are paid $4,000 or less in a bi-weekly pay period, or $104,000 per year, are eligible for this deferral.
After weeks of suspense, the Treasury Department released implementation guidance in the form of Notice 2020-65. Here’s what we know from that guidance:
What payroll taxes can be deferred?
Employers can defer withholding the employees’ portion of Social Security taxes. This is 6.2% of wages up to $137,700. For example, an employee who earns $1,000 every two weeks would see an extra $62 in their take-home pay. This is for pay periods beginning after September 1, 2020, and ending before December 31, 2020.
Which employees are eligible?
Employees who are paid less than $4,000 in a given biweekly pay period, or the equivalent for different pay periods, are eligible. Eligibility is determined on a pay period-by-pay period basis, so an employee may qualify for one period, but not for the next.
Is this mandatory?
It does not appear to be mandatory except for federal employers. Neither the Executive Memorandum nor the Treasury guidance state that non-Federal employers are required to offer this deferral to employees. Press releases from Treasury and the IRS say that this is “allowed” and “available.” It’s not clear whether the decision to participate or not is up to the employer or the employee. However, because the employer is specified in the guidance as the one responsible for paying any deferred taxes, employers likely have the final say.
This is a deferral. What does that mean?
This is not a payroll tax holiday, but a delay in payment. The taxes that are not withheld for the rest of this year will have to be repaid in 2021. This means that participating employees will get bigger paychecks through the end of the year, but could see smaller paychecks starting on January 1. An employee earning $1,000 every two weeks could receive $62 more this year but might have $124 withheld from every paycheck starting in January through the end of April.
When do the deferred taxes get repaid?
Employers are required to start withholding and paying the deferred taxes on January 1, 2021, and must pay all the deferred taxes by April 30, 2021. As long as all deferred taxes are paid in by April 31, 2021, employers will not face late payment interest or penalties.
What happens if an employee leaves before the deferred taxes are repaid?
The guidance says that employers may make arrangements to collect the deferred taxes from employees. It appears to be up to the employer and the employee to determine how this will be done. This may mean that an employees’ final paycheck will be much smaller than anticipated, or that employers will have to make up the difference themselves.
Is it worth it?
Most small businesses are choosing not to implement this program and for good reason. First, it is an administrative headache, and so much so that many payroll services and professional employer organizations (PEO) are refusing to offer the service of administering the program. And second, the risk that the employer could be on the hook for the employee payroll tax if the employee decides to leave is not a risk that most employers want to take on. It not only has the potential to be costly, but it also would effectively act as a “bonus” for any employee who leaves or is fired! Based on what we know today, our recommendation is that small business owners should choose not to implement this program.