The Payroll Tax Deferral: What Business Owners Need to Know

The IRS recently issued guidance implementing President Donald Trump’s order to defer withholding and deposit of employees’ share of the social security tax. The deferral applies to employees earning under $104,000 pre-tax and applies to wages paid from Sept. 1, 2020 through Dec. 31, 2020.

If a business chooses to defer, employees would take home more cash with each paycheck until year end — 6.2 percent more cash, precisely. But it’s only a temporary increase, and those deferred taxes will still come due next year. From an employee’s perspective, the deferral functions like a short-term, interest-free loan that's repaid.

Conceptually, the employee social security tax deferral seems simple, but in practice it could add a new layer of complexity to your operations. Here’s what you should know about the recently implemented payroll tax deferral.

PARTICIPATION IS OPTIONAL

First, the U.S. Department of Treasury is not mandating businesses implement this change. Employers can continue collecting and remitting payroll taxes as they normally would. If you choose to defer withholding the social security tax, there are a few things you may want to consider.

THE DEFERRED TAXES ARE STILL OWED

While President Trump has said he’d like to see payroll taxes permanently removed, as it stands the pause in collection is temporary. While a business can decide to defer those taxes from now until Dec. 31, these taxes will still need to be paid.

According to guidance from the Treasury department, those taxes will need to be repaid between Jan. 1 and April 30, 2021. Under current guidance, that would result in “double withholding” for employees through the first four months of 2021 — decreasing employees’ take-home pay by 6.2 percent. Fees and penalties will accrue on unpaid balances after May 1, 2021.

WHAT ABOUT DEPARTING EMPLOYEES?

One big question that’s still hanging out there for business owners is how to collect deferred payroll taxes from an employee who, for example, leaves the company or makes less money in 2021.

Let’s say you defer the tax at your business in September, but an employee leaves in November. In 2021, how do you collect those deferred payroll taxes from that employee? Guidance from Treasury is that employers “if necessary … may make arrangements to otherwise collect”. Admittedly, this raises more questions than answers for business owners.

PROCEED CAREFULLY

As this is a new policy, there are a lot of questions. The Treasury Department may need to issue further guidance to clear up some questions about situations business owners may encounter. Because this adds complexity to your operations in 2021, it’s a good idea to work closely with a tax attorney and your financial advisor to decide how best to proceed.