On August 8th, President Trump issued an executive order on payroll tax deferrals for employees. The IRS has followed up that memo with Notice 2020-65. In short, employees making less than $4,000 bi-weekly can defer paying the 6.2% Social Security tax on their wages. This amount is not forgiven and will be collected from the employees’ wages from January 1 through April 30 of 2021.
There are many questions on this process. One of which is whether the employee payroll tax deferral is mandatory. Another common question relates to how the withholding will be handled if an employee no longer works for the employer during the repayment period.
Our understanding is that this payroll tax deferral is not mandatory, despite not being explicitly stated in the executive order or the IRS notice. Repayment will occur ratably from January 1, 2021 through April 30, 2021 and if needed employers can “make arrangements to otherwise collect” the deferred taxes if an employee is no longer employed by them during the repayment period. Details are not provided on how such repayment would occur, it is possible that if an employee terminates their employment the employer could collect the deferred payroll tax at the time of the final payroll, or work out an agreement to be repaid by the employee during the later repayment period. If the taxes are not withheld and deposited by April 30, 2021 the employer will likely be subject to penalties and interest.
It is extremely important that you, the employer, inform employees that this is not a permanent reduction in tax, only a deferral. The employee is ultimately responsible for paying back any amounts deferred. It is also very likely that the employee will feel the sting of the deferral after the new year as his or her withholding will be increased to make up for the temporary suspension withholding of the Social Security tax.
If you have further questions, contact your accountant.
For additional details, check out the following articles:
Our understanding is that this payroll tax deferral is not mandatory, despite not being explicitly stated in the executive order or the IRS notice. Repayment will occur ratably from January 1, 2021 through April 30, 2021 and if needed employers can “make arrangements to otherwise collect” the deferred taxes if an employee is no longer employed by them during the repayment period. Details are not provided on how such repayment would occur, it is possible that if an employee terminates their employment the employer could collect the deferred payroll tax at the time of the final payroll, or work out an agreement to be repaid by the employee during the later repayment period. If the taxes are not withheld and deposited by April 30, 2021 the employer will likely be subject to penalties and interest.
It is extremely important that you, the employer, inform employees that this is not a permanent reduction in tax, only a deferral. The employee is ultimately responsible for paying back any amounts deferred. It is also very likely that the employee will feel the sting of the deferral after the new year as his or her withholding will be increased to make up for the temporary suspension withholding of the Social Security tax.
If you have further questions, contact your accountant.
For additional details, check out the following articles:
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