The New Payroll Tax Deferral: Issues and Considerations for Employers

On August 8, 2020, President Trump issued a Presidential Memorandum (“Presidential Memo”) directing the Secretary of the Treasury (“Secretary”) to use his authority under the Internal Revenue Code to defer the withholding, deposit, and payment of certain tax obligations.¹   The Secretary thereafter determined that employers that are required to withhold and pay the employee share of social security tax are affected by the COVID-19 emergency for purposes of the relief described in the Presidential Memo and may therefore defer certain payroll taxes (“Deferral”).  For most employees, the Deferral applies only to their portion of Social Security taxes (6.2 percent of wages), and only for employees making less than $4,000 on a bi-weekly basis (e.g., approximately $104,000 annually) from the period September 1, 2020 through December 31, 2020.  The Deferral does not apply to Medicare tax withholdings (1.45 percent for most employees) or the employer’s share of Social Security (6.1 percent) or Medicare (1.45 percent).  By way of background, employers generally pick up half the tab of their employees’ Social Security and Medicare payroll taxes. Social Security taxes are 12.4% of gross pay up to an annual threshold of $137,700, and Medicare taxes are 2.9%.  As such, for the employees that qualify, the Deferral will put half of those tax obligations back into their check per pay period. This comes out to about $90 per week for someone making about $62,000 per year.

On August 28, 2020, the IRS offered guidance (“Guidance”) on the Deferral.  The Guidance does not mandate that employers participate in the Deferral.  For those employers that do participate, as the term “defer” makes clear, the tax obligation is simply deferred, not forgiven, so employers will need to collect those amounts from employees after the first of the year.  Each employees’ tax obligation will need to be paid by the employer by April 30, 2021, or steep penalties and interest will be assessed.  For employees this means that their take-home pay in early 2021 will likely shrink as their employers collect double the tax of what they typically would.

Most tax specialists agree that the Deferral doesn’t provide a real benefit to either the employee or employer.  For one, the CARES Act already gave employers to option to delay paying the Social Security taxes they collect.²   Another potential area of concern for employers is where the employee takes advantage of the Deferral but then leaves the company before the employer is able to recoup the amount in 2021.  In this scenario, the employer is responsible to pay back the taxes in 2021, regardless of whether they collected the tax from the employee or not according to the Presidential Memo and Guidance.  For this reason, employers that participate in the Deferral should consider consulting an attorney and having agreements with their employees about how the money would be paid back if they leave.  This also leads to administrative challenges for payroll services and software companies.  Employers should take into consideration these issues before jumping into the Deferral.

¹ The Presidential Memorandum is available at https://www.federalregister.gov/d/2020-17899

²  Under the CARES Act, employers who collected their employees’ Social Security taxes between March 27 and December 31, 2020, can delay paying half of that total until December 31, 2021, and the other half until December 31, 2022.