Tips for Employers on IRS’ Payroll Tax Deferral

Last month, the IRS issued guidance (notice 2020-65) on the President’s recent executive order to defer certain payroll tax obligations. Specifically, employers could offer to suspend their workers’ Social Security payroll taxes from Sept. 1 through Dec. 31, 2020. This deferral would apply only to employees whose wages are less than $4,000 for a biweekly pay period, including salaried workers earning less than $104,000 per year.

When determining whether suspend collection of eligible employees’ Social Security payroll taxes, here are a few things that employers must consider:

As a tax deferral, the Social Security payroll tax obligations are not eliminated; they are merely delayed. Employees would need to repay the deferred payroll taxes during the first four months of 2021. And the responsibility falls on the employers to ensure that the previously deferred payroll taxes are collected from workers’ paychecks. Some employees may not understand that the payroll tax suspension is not permanent and requires future repayment. If employers do not return the previously deferred tax amounts to the IRS by April 30, 2021, penalties and interest will begin to accrue on tax amounts that have not been repaid.

Therefore, if a company does indeed decide to defer some of its employee’s payroll taxes, it would be wise for the employer to create an agreement with employees acknowledging that the deferral is short-term and that they will pay the money back beginning 2021, even if they leave the company.  

Even if an employee requests the payroll tax deferral, the employer is not required to provide deferral. It is up to the employer to determine whether to provide the relief, but they are not obligated to do so. If, however, an employer does decide to offer temporary tax suspension, the employer may want to provide employees with an opt-in or opt-out option, as some may choose not to defer a portion of their taxes.

Since the deferral period ends at the end of 2020, employers should decide soon if they want to offer the option to their employees. There a number of considerations that may go into an employers’ decision, such as working with vendors to make payroll system changes and budgeting for the repayment of taxes in the event collection from employees is not possible. Employers do not need to decide right away if they want to implement the program, but they should not wait too long. The deferral only lasts until the end of the year and taxes are not retroactive, meaning that employers cannot adjust payrolls processed in the past. For example, if an employer begins the deferral in October, they cannot refund employees for amounts that were deducted for Social Security taxes in September.

All in all, whether an employer decides to offer the deferral to its employees, the employer should monitor for additional guidance from Treasury, the IRS, and legislative bodies. There have been discussions of forgiving the deferral, but, ultimately, only time will tell.