In early August, President Trump signed an executive order directing the Secretary of Treasury to defer the withholding, deposit and payment of the employee portion of Social Security taxes on wages paid from September 1, 2020, through December 31, 2020. The intention is to provide a small amount of temporary relief to employees, increasing their take home pay by not removing the 6.2% tax from their paychecks until 2021.
The Treasury Department and the Internal Revenue Service (IRS) released guidance on how to implement the deferral this past Friday. However, the guidance doesn’t offer sufficient information on the program or its implementation, and the late release of this guidance has left employers and payroll processors no time to get their payroll systems ready.
Employers are left with a lot of questions about the payroll tax deferral program and whether or not they are required to participate in it. While we are still waiting for sufficient guidance to share with employers, here’s what we do know:
1. Participation is not mandatory.
The memorandum and guidance do not explicitly state that employers must participate. Consistent with section 7508A of the Internal Revenue Code, the IRS and Treasury use permissive language to describe the guidance as “allowing” deferral and “available” to employers.
2. Taxes will not be forgiven.
There is no indication that these taxes will be forgiven at any point, which may leave the employer on the hook for repayment if the employee is terminated or quits before repayment. The guidance also suggests that there will be additional penalties and interest fees if these taxes are not paid back by May 1, 2021.
3. Employees will pay double tax in 2021. Employees who choose the deferral will see a temporary increase in pay from now until the end of the year, but will then see a dramatic decrease in their pay from January through May, as they repay the deferred taxes while simultaneously paying the normal employee portion of taxes.
With the limited guidance and high liability, many employers are choosing to opt out of this deferral program. Rusty Taylor, CFO of Constellation Behavioral Health, an Emplicity HR Outsourcing & PEO client in Southern California, offered his perspective on the deferral, based on some of the observations noted above. “I believe it to be safer to opt out at this time and allow Congress to work through their process to decide if this deferral can be effectuated into a permanent tax reduction and then, an employee can receive those monies on their return.”
“The order takes the employee portion and places it onto the employer as a burden,” Mr. Taylor warned. Employers who do opt in will need to ask employees if they would like to participate and then track those employees separately from employees who opt out of the deferral program. Mr. Taylor added, “The tracking of it also seems onerous.”
Notice: Emplicity provides HR advice and recommendations. Information provided by Emplicity is not intended as a substitute for employment law counsel. At no time will Emplicity have the authority or right to make decisions on behalf of its clients.
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Since 1995, Emplicity has provided a smarter, more secure, and integrated platform of employer services to its 300 business clients and their 8,500 employees. As a Professional Employer Organization, or PEO, the California-based HR outsourcing firm simplifies the compliance, administration, and support businesses need in the areas of employee benefits, payroll, and human resources technology.
NOTICE: Emplicity provides HR advice and recommendations. Information provided by Emplicity is not intended as a substitute for employment law counsel. At no time will Emplicity have the authority or right to make decisions on behalf of its clients.