Payroll Tax Deferral, If You Dare
In early August, President Trump issued a presidential memorandum providing relief to working Americans. The order directed Treasury Secretary Steven Mnuchin to provide temporary relief by deferring the withholding, deposit, and payment of the 6.2% employee portion of the Social Security tax from September 1, 2020 through December 31, 2020. The deferral is limited to employees whose pre-tax bi-weekly wages or compensation is less than $4,000 (including salaried workers earning less than $104,000 annually). Penalties, interest, and additions to tax do not apply during the period of deferral. The memorandum includes a directive to the Treasury Secretary to explore avenues, including legislation, to eliminate the obligation to pay the deferred taxes.
Secretary Mnuchin publicly stated an employer has the option to defer payroll taxes.
To provide further guidance regarding the payroll tax deferral, the Internal Revenue Service (IRS) released Notice 2020-65. Specifically, the Notice does the following:
- Requires the employer to withhold and deposit amounts previously deferred ratably from January 1, 2021 through April 30, 2021.
- If necessary (e.g., an employee leaves employment before paying back the deferred payroll tax), an employer “may make arrangements” to otherwise collect the tax.
In deciding whether to defer the payroll tax, an employer should consider the following items:
- The magnitude of the implementation costs. How much time, effort, and money will it cost to reprogram the payroll system now and again in January? In the case of outsourced payroll, what extra charges will apply in implementing the deferral?
- What will happen if an employee leaves or takes a family leave? What arrangements will the employer make? If the employer does not collect the deferred amount on the employee’s final paycheck, the employer will likely never recover the amount. IRS Notice 2020-65 places the responsibility for payment of the deferred amounts squarely on the shoulders of the employer. Conversations with liability carriers therefore become critical.
- How will the employer communicate the decision to your employees? Opting out may disappoint employees and diminish morale. Consequently, an employer should clearly and completely communicate with employees to mitigate this issue. If Congress does not pass legislation forgiving the repayment, the employees will pay double Social Security tax of 12.4% from January through April.
- Will the employees, in fact, materially benefit from immediate tax relief? Unless ultimately forgiven, the deferral essentially functions as a very short-term, interest-free loan to the employee.
Part of the order suspending the employee portion of the Social Security tax directs the Secretary of the Treasury to “explore avenues, including legislation, to eliminate the obligation to pay the taxes deferred pursuant to the implementation of this memorandum.” If a bill does pass Congress forgiving the deferred payroll tax, it becomes an easy choice for an employer to opt into the deferral. However, one cannot assume Congress will forgive the deferred payroll taxes. For example, some commentators have suggested that not much legislation will take place until after the November elections.
For more information on the payroll tax deferral and how it may impact your business please contact one of our experienced CPAs or tax professionals at Kurtz & Company, P.C.