An executive order was issued by President Trump on August 8, 2020 that allows employers to defer the employee portion of FICA (6.2% payroll tax rate) paid between September 1, 2020 and December 31, 2020. The IRS issued Notice 2020-65 last week providing further guidance. We currently do not find the deferral to be advantageous for either the employer or employee, and we expect most employers will not participate.
Participating in the deferral is not mandatory. However, we suggest that you communicate to your employees if you elect not to defer the payroll taxes. If you do participate, please note that the guidance places the responsibility to eventually remit the deferred FICA tax on the employer. The employer must begin deducting the deferred FICA tax from the employee's paycheck on January 1, 2021 through April 30, 2021.
The FICA deferral is only eligible if the amount of such wages or compensation paid for a bi-weekly pay period is less than $4,000, or the equivalent threshold amount with respect to other pay periods. No deferral is allowed if the pay is greater than this amount. The determination is made on a pay period-by-pay period basis. The maximum amount that could be deferred per employee is about $2,150.
The deferral is aimed to be an interest free loan to the employee for the last four months of the year. However, employees' paychecks will be less in January through April 2021. Additionally, the employer will be at risk of having to pay the deferred FICA taxes of an employee who leaves prior to recouping the full amount of their 2020 deferred taxes in 2021. The guidance does allow an employer to withhold the remaining deferral amount of any final paycheck provided the pay amount is large enough.
We will provide you an update if further guidance is released that make this deferral more advantageous.