September 11, 2020

Social Security Payroll Tax Deferral

An Executive Order signed by President Trump on August 8 allows employers to temporarily defer withholding, deposit and payment of employees’ 6.2% social security payroll tax on wages paid from September 1 to December 31, 2020. In order to be eligible, employees must earn less than $4,000 bi-weekly, before taxes. Employers are still required to contribute their portion of social security tax.

It is important to understand that this is a deferral of tax obligation, not a tax exemption or forgiveness. Employers who suspend withholding of the tax will be required to repay the deferred tax amounts to the IRS over a four month payback period between January 1 and April 30, 2021. In order to accomplish this, employers will need to increase employee social security tax withholding during the payback period. Penalties and interest will begin to accrue on employers for tax amounts that have not been repaid after April 30. 2021.

Nothing in the IRS guidance or the Executive Order provides that employers are required to participate and defer withholding. Most employers are choosing not to participate. But, for those employers who do elect to defer, they should give the following items consideration:

  • Employers will need to evaluate the cost and capabilities of their payroll systems. The decision to alter withholdings can involve a substantial investment of time and money to retool existing payroll systems.
  • Employers will need to evaluate eligibility for each employee. As mentioned previously, employees must earn less than $4,000 bi-weekly, or the equivalent threshold amount if employees are paid for different pay periods (weekly, semi-monthly, monthly, etc.). 

  • Employers will need to educate employees and explain what this means for them financially. Employees will need to understand that although they will see an increase in their take home pay at the tail end of 2020, they will also see double the Social Security tax withheld from their paychecks at the start of 2021 in order to pay back the deferral. 

  • The Order does not provide any relief to employers if they are unable to recover the deferred taxes from employees during the payback period. For example, if a company defers the tax and an employee quits or terminates before the taxes can we withheld, the employer will still be obligated to pay the employee’s taxes. Employers may want to consult an attorney to create an agreement that employees can sign which details how they will repay the tax if they leave the company. 

  • The deferral is not retroactive. Employers are not permitted to provide refunds to employees for amounts that have already been deducted for social security tax. For example, if a company implements the deferral in October, they can only defer taxes for October – December. They cannot go back and make adjustments for payrolls processed in September.  

Sources: Forbes, “Trump’s Payroll Tax Holiday Starts Today: How Does It Work? SHRM, “IRS Guidance Allows Workers a Payroll Tax Holiday” SHRM, “Employers Hesitant, Confused Over Payroll Tax Holiday” 

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