Considering payroll tax deferral? Proceed with caution.
On August 8, President Trump issued a Presidential Memorandum on deferring payroll tax obligations. Under the terms of the Memorandum, withholding, deposit, and payment of the employee’s share of the 6.2% social security tax are deferred on wages paid during the period of September 1, 2020 and ending December 31, 2020.
The deferral only applies to employees with bi-weekly, pre-tax income of less than $4,000 (approximately $104,000 annual salary), or a similar amount if a different pay period applies. The executive order left many open questions leaving employers wondering how the order impacts their business and with only a few weeks to consider changes to payroll systems.
On August 28, the Department of Treasury and the Internal Revenue Service issued guidance regarding implementation of the deferral. Notice 2020-65 confirms:
- the deferral applies to wages paid to an employee on a pay date beginning on September 1, 2020 and ending on December 31, 2020.
- the deferral amount must be repaid between January 1, 2021 and the April 30, 2021.
- the obligation to repay is on the employer and not the employee.
Employer considerations and continued open questions
- It is still unclear as to whether employees can opt in or opt out of the deferral.
- Beginning in January 2021, employers will need to begin to withhold the deferred amounts from the employees.
- This is simply a deferral of the tax, not a forgiveness. Employers choosing to implement the payroll tax deferral should communicate to employees that net checks in the beginning of 2021 will be lower.
- If an employee leaves employment prior to the end of 2020, the employer will still be responsible for the deferred amounts even if it is unable to obtain the amounts from the former employee.
Until additional guidance is issued, we recommend employers proceed with caution since the employer is responsible for the repayment. Hopefully, there will be additional guidance allowing an employer to better assess the benefits and risks of the deferral.
If you have questions about what these changes mean for you or your organization, please contact us.
Note on COVID-19
Boyer & Ritter’s trusted CPAs and business advisors will continue to review this and all COVID-19 related legislation and support you with information on any clarifications or updates. Please see the following resources:
- COVID-19 News & Resource Center
- Learn how our Business Relief Advisory Services team can help you submit a complete and accurate application for loan forgiveness.
J. Gregory Hamm, JD, CPA, is a director of Boyer & Ritter’s Tax Services Group and has nearly 30 years of experience in public accounting. He provides tax and consulting services for a variety of clients and industry groups. Gregg can be reached at 717.761.7210 or firstname.lastname@example.org.