On August 8, President Trump issued a Presidential Memorandum to defer the payment of the employee share of social security tax from September 1 through December 31, 2021. But what, exactly, does this Payroll Tax Deferral mean, and should employers take advantage of it?
11 Things You Need to Know About the 2020 Payroll Tax Deferral
This payroll tax deferral was enacted by President Trump to provide relief to some employees through the end of the year. However, some points of the action are confusing or off-putting to employers and employees alike. Here’s what you need to know:
1. Employees Must Make Less than $4,000 Bi-Weekly to Qualify
The cutoff for qualifying for the payroll tax deferral is $4,000 bi-weekly, or equivalent amounts for other payroll schedules. There is no “phase out” for amounts leading up to $4,000 bi-weekly, so individuals making $3,999 every two weeks would qualify while individuals making $4,000 every two weeks would not.
2. It is the Employer’s Decision Whether to Offer the Deferral
Employers are not required to defer payroll tax for their employees during the deferral period. They can make the decision on a company-wide basis, and even on an employee-by-employee basis. However, keep in mind that only employees making less than $4,000 bi-weekly are eligible.
3. Commissions and Bonuses Apply
If you receive commissions or bonuses that inflate a paycheck to over $4,000 during the deferral pay period, you would not be eligible to receive the payroll deferral for that paycheck.
4. It’s Not All or Nothing
The payroll tax deferral is not based on an average bi-weekly income; it is based on the actual payroll being paid out to the individual every two weeks. While an employee may qualify one pay period for making less than $4k, they may not qualify the next pay period if they make more than $4k. It also means you don’t “opt in” for the entire period; you can start late or end early. This is one reason some employers are put off by the deferral since it can be difficult to track, especially with companies who have a large number of employees.
5. It is Employee-Side Social Security Tax that is Being Deferred
The tax being deferred is the employee-side Social Security tax, which is 6.2% of an individual’s income. Therefore, this is a benefit to the employee and not necessarily a fiduciary benefit to employers.
6. This is Only a Delay
The payroll tax deferral, at this time, is not a forgiveness; it is only a delay. These payroll taxes will be required to be paid back beginning January 2021. For most employers, this will mean withholding increased payroll taxes from January 1 through April 30. For employees whose annual wage remains the same between now and April 30, this will mean they have 2X as much Social Security tax withheld during this period (6.2% normal Social Security tax withholding plus a portion of deferred Social Security tax withholdings from 2020).
7. This Could Increase Net Pay for Some Employees
The reason this is being offered as a relief for employees is because it means that employees making less than $4,000 bi-weekly will likely see an increase in net pay. Social security tax is 6.2% of your wages, which means that this deferral could increase your net pay in that amount through December.
8. Paychecks Will Decrease for These Employees in January
Since the deferral is, at this time, a deferral, not a forgiveness, the amount withheld will have to be paid back beginning January 2021. The employer will have to recover the total deferred amount from the employee, which will generally mean that from January 1-April 30, 2021, paychecks will decrease 6.2% in addition to the regular payroll tax rate to cover these additional costs.
9. At This Time, Forgiveness is Not Guaranteed
The goal of this deferral is to have the payroll tax forgiven before the repayment period begins in January 2021. However, at this time, the issue is divided. Before signing the deferral tax memorandum, President Trump spent months pushing for a coronavirus relief legislation that would include a payroll tax holiday, but the proposition met resistance on both sides. Now, the president hopes to be able to turn the deferral into a payroll tax cut, but it would require congressional action. At this time, Democrats and Republicans have yet to reach an agreement on another coronavirus relief package.
10. Many Employers are Opting Out Due to Administrative Efforts
Changing payroll systems is always tricky. This is even more the case when the change only applies to some employees, only applies for a short period of time, and when the change will require a second update in the beginning of 2021 to recover the deferred amounts. Because of these administrative challenges, many employers are opting out of the deferral. For those employers who use payroll companies, many of these companies did not have these changes made and available at the beginning of the deferral period, so some employers who did opt in were not able to defer during the first payroll of the deferral period.
11. There is No Guidance in Place for Employers Who Lose Employees
Your employer will generally offer repayment of these withheld taxes in even amounts from January 1 through April 30, 2021, but if an employee changes jobs, the employer would still be liable for the payroll tax deferred. There are not yet any guidelines for how employers would recover the deferred payroll tax from employees who left prior to or during the payback period, but it is assumed that the employer would be able to withhold the entire deferred amount in a single paycheck. For some employees, this would mean their final paycheck would be significantly reduced.
Should I Take Advantage of the Payroll Tax Deferral?
Some businesses question whether they want to participate in the payroll tax deferral. This is because it increases administrative work for the next 8 months (4 months of deferrals and 4 months of paybacks). It also means that employees will receive less in take-home pay beginning January 1, 2021. Some companies are banking on the hope that Congress will pass legislation to forgive the deferred taxes, but at this time, there is no guarantee.
About the Author
Jill Tavey is an experienced outsourced CFO with over a decade of high-level financial expertise and experience. Her ability to negotiate, make and maintain key relationships, and shape strategic direction has helped propel multiple companies through significant growth.
Jill Tavey, CFO
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