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What You Need to Know About the Payroll Tax Deferral

payroll tax deferral

What is the Payroll Tax Deferral?

On August 8, 2020, President Trump and the White House issued a Memorandum on Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster[1] for the Secretary of the Treasury, Steven Mnuchin, as a direct response to the novel coronavirus (COVID-19), which has “caused significant, sudden, and unexpected disruptions to the American economy.”

The Memorandum goes on to state, “American workers have been particularly hard hit by this ongoing disaster.  While the Department of the Treasury has already undertaken historic efforts to alleviate the hardships of our citizens, it is clear that further temporary relief is necessary to support working Americans during these challenging times.  To that end, today I am directing the Secretary of the Treasury to use his authority to defer certain payroll tax obligations with respect to the American workers most in need.  This modest, targeted action will put money directly in the pockets of American workers and generate additional incentives for work and employment, right when the money is needed most.”

This Executive Order allowed employers to defer withholding and payment of an employee’s portion of the Social Security Tax until the end of the calendar year. The effective date of this payroll tax deferral was September 1, 2020, and while employers were given the option to defer the withholding and payment for payroll taxes, they were not required to do so. The deferral only applies to taxes on wages that are paid to employees during the time period of September 1, 2020 through December 31, 2020. Deferrals are not available for employees who have taxable wages of over $4,000 per bi-weekly pay period.

If an employer opts not to participate in the payroll tax deferral program, the employee’s wages will continue to be taxed as normal, with the FICA portion of the federal payroll tax continuing to be taken out.

Kevin Brady, Ranking Republican on the House Ways and Means Committees, said in a statement on September 3, 2020, “The [Executive Order] provides temporary relief for employers from the obligation to withhold and pay the employee portion of Social Security payroll taxes for certain employees… The EO does not mandate deferral, nor does it outline any penalty as a result of not participating in the deferral.”

The decision to participate in the payroll tax deferral is solely up to the employer. 

How do I report the Payroll Tax Deferral?

The Internal Revenue Service is currently working on amending Form 941, Employer’s Quarterly Federal Tax Return, and has issued a draft of the revised form, with an added line to reflect any payroll tax deferrals.

Employers that choose not to participate in the payroll tax deferral program are required to submit payment for any payroll taxes as required normally.

When do I have to pay back the Payroll Tax Deferral?

Unless Congress writes a bill authorizing forgiveness to employers for these tax liabilities, employers that have chosen to participate in the payroll tax deferral program will need to withhold the deferred taxes between January 1, 2021 and April 30, 2021, in addition to the normal payroll taxes that are deducted during that time period. Essentially this means that employees could potentially have twice the normal deduction taken from their paychecks for the first 4 months of next year to pay back the deferral.

The Executive Order states that “The Secretary of the Treasury shall explore avenues, including legislation, to eliminate the obligation to pay the taxes deferred pursuant to the implementation of this memorandum.”

However, suppose you find yourself in the position where you’ve chosen to participate in the payroll tax deferral. Given that, you may have an employee leave your company before the deferment is paid back to the IRS. In that case, the company may be held responsible for paying back both its and the employee’s portion of the deferred taxes. If you, the employer, are not able to collect the deferred taxes from the employee, the IRS could go after the employer. This reasoning alone has discouraged most companies from participating.

Is the Payroll Tax Deferral right for my company?

There has generally been a lack of enthusiasm from employers supporting the payroll tax deferral because they don’t want their employees to be responsible for repaying the deferment in the beginning of next year, especially with income taxes being filed on April 15.

One employer participating in the Payroll Tax Deferral is the United States Federal Government. Adam Cohen, partner at law firm Eversheds Sutherland said, “The federal government is participating in this deferral… Government agencies that have to collect Social Security taxes have been instructed to do a payroll tax deferral for their employees.”

Although the information around this legislation will likely change, if you have any questions about payroll tax deferral and if it’s right for your company, please contact us.

References

[1] Presidential memoranda have the same legal effect as executive orders; the only difference is that executive orders are published in the Congressional Record and presidential memoranda are not. https://www.whitehouse.gov/presidential-actions/memorandum-deferring-payroll-tax-obligations-light-ongoing-covid-19-disaster/

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