Payroll Tax Deferral: More Cash Today, Less Cash Tomorrow
September 2, 2020 Author: Matt Caras, CPA Compass Pointe CPAs
On August 8, 2020, President Trump issued memorandum 2020-17899 directing the Secretary of the Treasury to use his authority to defer the withholding, deposit, and payment of certain payroll tax obligations. The IRS later issued Notice 2020-65 which goes into greater detail on what the deferral means for employers:
- The payroll tax deferral is only for the employee’s share of the 6.2% Social Security tax.
- Applicable wages are those paid to an employee on a pay date during the period of September 1, 2020 through December 31, 2020. The pay date matters and not when the wages are earned.
- Deferral is applicable to wages that are paid during that period that are less than $104,000 annualized ($4,000 biweekly, $2,000 weekly, $4,333.33 semi-monthly).
- The determination for deferral is made on a pay period-by-pay period basis.
- The employer who defers the withholding and payment of the employee’s social security tax must then withhold and pay the employee’s social security tax ratably from wages paid to the affected employee between January 1, 2021, and April 30, 2021. If necessary, the employer may make arrangements to otherwise collect the total applicable taxes from the employee.
- Although it is not explicitly stated, comments from the Treasury have determined that employers may decide to not opt-in to the deferral program. If the employer does not opt-in, they must continue to withhold and pay the employee’s social security taxes per usual and it cannot be delayed.
From the employee’s perspective, they will receive more cash today, but less cash later. Essentially kicking the can down the road for a few months.
From the employer’s perspective, there is an added administrative burden to calculate and track the total social security taxes deferred by employees. The employer’s fiduciary duty is not limited by this deferral program and creates a potential risk for unpaid taxes. Although the IRS Notice does state the employer can make arrangements to collect the applicable taxes from the employee, the method for that collection is unknown and could be costly to the employer.
If you have any questions about the Payroll Tax Deferral, please contact us at Compass Pointe CPAs.