On August 8, 2020, the President of the United States issued presidential memoranda on deferring payroll tax obligations in light of the ongoing COVID-19 pandemic. Under certain circumstances, this executive order permits the deferral of the employee’s share of payroll taxes until 2021.
The payroll tax deferral, also known as the “Payroll Tax Holiday,” suspends the withholding of social security tax (6.2%) from employee earnings between September 1, 2020 and December 31, 2020. The funds would then need to be repaid in 2021 between January 1, 2021 and April 30, 2021. Unpaid deferred tax will begin to accrue interest and penalties effective May 1, 2021.
Who is eligible?
American workers making less than $104,000/year are eligible for this Payroll Tax Holiday. The tax deferral will be calculated per payroll and not annualized, with each employee’s deferral eligibility determined separately for each pay period as follows:
What are applicable wages?
For purposes of the IRS Notice 2020-65, Applicable Wages mean wages as defined in section 3121(a) (FICA/Medicare wages) or compensation as defined in section 3231(e) (RRTA/Medicare wages), paid to an employee on a pay date during the period beginning on September 1, 2020, and ending on December 31, 2020.
What does this mean for employees?
If an employer chooses to allow eligible employees to participate, those employees will see their net paycheck increase by 6.2% between September 1st through December 31st. However, employees will see their net paycheck decrease by 6.2% between January 1, 2021 and April 30, 2021 during the re-payment period. It is important for employees to understand that although their pay will be higher during the “Payroll Tax Holiday,” their pay will be lower during the first four months of 2021.
Who is responsible for the repayment of the deferred social security tax?
Current guidance requires employers withhold and pay the tax that the employer deferred ratably from wages and compensation. It is important to note that current guidance indicates that the burden falls on the shoulders of employers. Employers will either need to collect the tax from an employee’s paycheck or pay it themselves in early 2021. The guidance does not elaborate regarding what employers should do if an employee is terminated before April 30, 2021, but it is clear that employers will be on the hook to repay this tax beginning May 1, 2021 if they cannot collect the funds from the employee, and will also incur penalties and interest.
What should employers do?
Absent of further guidance by the IRS, we suggest employers opt-out of the Payroll Tax Holiday.
If an employer decides to opt in to the Payroll Tax Holiday, we recommend employers consult with their accountant and legal counsel to better understand their options regarding the repayment of deferred amounts, particularly those attributed to employees terminated during the deferral period. Applicable state laws and withholding rules may prove difficult when dealing with compliance issues.
It is also recommended for employers choosing to opt in to require documentation from their employees indicating their option to participate in this deferral and the potential tax liabilities in 2021 to include re-payment terms.
On August 28, 2020, the IRS released a draft Form 941 that included the line items portion of the deferred Social Security tax. This may be an indicator that the IRS will release another revised Form 941, which will include the repayment of the employee’s deferred Social Security tax.
Employers who choose to opt out and not defer their employees’ payroll taxes could potentially miss out on potential tax forgiveness if legislation to “forgive” the deferred taxes is passed in 2021. Lawmakers passing the legislation is a long shot in and of itself, but it is nevertheless a real possibility.
This information for informational purposes only. This should not be construed as accounting or legal advice or opinion. Business owners and qualifying individuals who have questions regarding the information noted above should contact their E. Cohen advisor.