By: Brett Strauss, Esq.
By now most employers are aware of President Trump’s Executive Order from August 8, 2020. This directed the U.S. Department of the Treasury to defer certain payroll tax obligations amid the ongoing COVID-19 pandemic.
On August 28, 2020, the IRS issued guidance and provided a phone number for Employers to call for additional support. In the phone recording, the IRS clarifies a few key points:
- The notice provides relief allowing employers to postpone the due date of the employee share of social security taxes.
- Employers may utilize the relief, but it’s not a requirement.
- Nothing in the notice addresses how an employer can choose to implement the relief. Accordingly, nothing in the notice precludes employers from getting employee input on whether or not to offer the tax deferral.
What Should Employers Do?
Now that it’s clear that employers have a choice to participate, you should consider your decision carefully. I know that helping your employees during this difficult time is extremely important. However, participating in this particular relief may expose employers to unknown liability due to the many current unknowns.
For example, what if you defer the employee tax and that employee separates from your company before tax amounts are repaid? There’s been some speculation that the IRS may issue further guidance about how to deal with this particular situation. However, in California, we already know that Employers would not be able to deduct any of these tax deferrals from a final paycheck without written authorization from the employee.
Another concern is the upcoming election in November. If President Trump wins re-election then it’s possible he may ask Congress to forgive the deferred amounts. But since that’s still up in the air, the current plan is that employees choosing to defer payroll tax obligations under this executive order now will repay the deferred amount in the first quarter of 2021.
Prior to withholding these taxes, employers should have a conversation with their employees. Employees should understand that this is a short-term deferral. As such, any increase they’d see in their paycheck for the remainder of 2020 would be offset by a similar decrease in their paycheck during the first quarter of 2021.
Here’s an example of what this employee tax deferral would look like:
Bob is an employee of XYZ, Inc. and has an annual wage of $50,000 paid on the 15th and last day of each month. (This comes out to $2,083 per pay period.) Since Bob’s bi-weekly pay is less than $4,000, he is eligible for the Social Security employee tax deferral.
Assuming XYZ, Inc. chooses to implement the deferral, Bob’s net paycheck would increase by approximately $129 for each pay period during the September 1, 2020, through December 31, 2020, deferral period (6.2 percent of $2,083).
Bob’s total Social Security tax deferred would be approximately $1,032. This is the amount that XYZ, Inc. would have to recover via additional Social Security tax withholding from Bob’s paychecks during the period January 1, 2021, through April 30, 2021.
In other words, assuming Bob’s annual wage in 2021 is still $50,000, he would have $258 of Social Security tax withheld during the January 1, 2021, through April 30, 2021, pay periods. ($129 of normal Social Security tax withholding plus the ratable portion of the $1,032 in deferred Social Security tax withholdings from 2020.)
Due to the many uncertainties ahead and the many unanswered questions, it may make sense to hold off on deferring these taxes right now and look into other options to assist your employees that need help.
We can help you provide a few different financial resources to your employees in lieu of this short-term deferral. However, if you choose to participate in the tax deferral, we are here to help. Our HR Services Team can assist with all the documents you’d need to reduce liability and avoid confusion down the road.
To learn more about our HR support options and get in touch with a member of our team, you can contact us here. Stay tuned for more updates on the Executive Order in our COVID-19 Business Resources Hub. Finally, don’t forget to follow us out on Facebook, Twitter, and LinkedIn for even more business tips & tricks!