Employee Social Security Payroll Tax Deferrals Begin Amid Continued Questions
On August 8, 2020, the President issued a memorandum directing the Treasury Department and IRS to implement additional COVID-19 relief measures aimed at deferring employee payroll tax obligations to provide immediate relief to American workers. Starting on September 1, employers can defer the withholding, deposit, and payment of the employee’s portion of Social Security payroll taxes owed between now and the end of the year.
It is important to note that this deferral is optional and does not eliminate the employee’s payroll tax obligation. Employees who decide to take advantage of this deferral will see an increase in take home pay between now and the end of the year; however, they will still be responsible for repaying the deferred Social Security payroll taxes by April 30, 2021. For most employees, this will mean additional Social Security withholdings starting on January 1, 2021.
Which employees are eligible?
Employees making less than $4,000 on a bi-weekly basis, or equivalent period, are eligible for this deferral. This determination should be made on a pay period by pay period basis; meaning that each pay period would qualify independently of other pay periods, in cases where compensation amounts may fluctuate.
What should employers be doing?
- Employers should clearly communicate with their employees that this is not a tax holiday or a permanent reduction in the payroll taxes owed between September 1 and the end of the year. Barring an act of Congress, the employees are still on the hook for the full amount of the deferred payroll taxes and they will be expected to make additional payroll tax deferrals in 2021 to make up for any amounts deferred in 2020.
- Employers should ensure that proper record keeping is in place to track participating employees and the amounts deferred. This will help employees have a full understanding of the taxes required to be repaid. Additionally, this latest deferral should be tracked separately from the tax deferral applicable to the employer portion of Social Security payroll, which was authorized under the CARES Act. For those businesses using a payroll service, your providers should be able to track and provide reports for each of these deferral programs.
- Employers should also consider the impact of employee terminations made during or after the deferment period. If an employee leaves the organization, and the employer has not recovered the full amount of the deferred payroll taxes, the employer will be liable to repay all amounts owed. In light of this, employers may want to consider making participating employees sign a contract stating that the employee will reimburse all deferred payroll taxes in the event they leave the organization prior to repayment.
Are there other unknowns?
The President authorized this latest relief measure as a way of temporarily increasing employees’ take home pay. Only Congress has the statutory authority to permanently provide forgiveness of the deferred Social Security taxes. At the moment, there does not appear to be a compromise between the President and Congress on a bill that would eliminate the employee's obligation to repay the deferred taxes.
If you have any questions related to this latest payroll tax deferral or other COVID-19 relief efforts, please contact WEC’s Advisory Team.