Employee Payroll Tax Deferral Guidance | Employer Participation Risks

Payroll Tax Deferral Plan – Understand the Risks and Benefits, Proceed with Caution

Published on by Scott Cress in COVID-19

Payroll Tax Deferral Plan – Understand the Risks and Benefits, Proceed with Caution

At first glance, the new payroll-tax deferral plan appears to provide relief to employees struggling in the wake of the sweeping economic devastation caused by the global pandemic – but know that there are substantial risks to both employees and employers in participating.

What the Payroll Tax Deferral Plan Does

Established by President Trump’s August 8 Presidential Memorandum, the plan allows employers to defer withholdings of the 6.2% employee share of Social Security taxes for the period beginning September 1, 2020 and ending December 31, 2020. The deferral can be applied to employees whose pre-tax wages payable on a bi-weekly pay date during the period beginning September 1 are less than $4,000 ($104,000 annually). Note that the eligibility for the deferrals is determined on a pay-period by pay-period basis, so it’s possible that an employee could qualify for one pay period and not for the next.

Unclear How Congress Will Respond

It’s critically important to understand that the plan is a temporary loan, and must be repaid during the first four months of 2021. While the President has voiced his hope that Congress will forgive these tax deferrals and fill the hole in Social Security funds through other means, there is no guarantee that Congress will forgive the payroll-tax deferral plan.

If Congress chooses not to act, the deferred taxes are to be withheld and collected ratably from wages paid, in addition to normal payroll taxes on those wages beginning January 1, 2021 – potentially leaving employees with a smaller paycheck than ever. Interest, penalties, and additions to tax will begin to accrue on May 1, 2021 on any unpaid payroll taxes, and the employer will bear the burden of paying the deferred tax prior to that date.

The Risks of Relief

With this substantial uncertainty in play, some employers are voicing concerns that if the loans are not forgiven, what was intended to provide financial relief to struggling employees could actually create a greater financial problem for employees and employers alike in the first four months of 2021 as they struggle to repay the deferred Social Security tax.

Others indicate that any relief for their employees is positive, and are therefore willing to risk the loans not being forgiven in favor of short-term relief. Regardless of where you fall on the spectrum, know there is risk in participating in the Social Security payroll tax deferral program.

Employers Could Be Left Holding the Bag

What happens if an employee leaves the company without repaying the 6.2% deferred tax? The IRS has not provided guidance on this point, though IRS Notice 2020-65 (issued August 28, 2020) does state that if necessary, employers “may make arrangements” to otherwise collect the deferred taxes from employees but does not provide further details.

Can Employees Opt Out if the Employer Elects to Participate?

Based on current guidance, it appears that employers can decide whether or not to participate in the Social Security tax deferral program, but it is unclear whether employees can opt out of the plan if their employer decides to participate.

Proceed with Caution

We can expect additional guidance from the IRS, but the biggest risk to employers and employees alike is how Congress will respond to the President’s suggestion – and the upcoming election will potentially play a role in this as well. However, you decide to proceed with the payroll tax deferral plan, do so with caution.

If you have questions about the right approach for your business and its employees or would like to discuss other tax planning strategies, contact the professionals at Barnes Dennig. Our in-depth experience and attention to detail and nuance enable us to develop innovative insights and game-changing strategies to minimize your tax burden. Contact us today – we’re here to help.

Barnes Dennig COVID-19 Advisory Team


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