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Workforce Management

Payroll Tax Deferral: What it Means for Your Business and Employees

Memorandum Background

On August 8, President Trump signed a memorandum that directed “the Secretary of the Treasury to use his authority to defer certain payroll tax obligations with respect to the American workers most in need” as a result of the coronavirus pandemic. The administration’s hope is that, by temporarily eliminating the employee payroll tax, they can help mitigate the financial hardship some citizens are experiencing as a result of the COVID-19 pandemic.

This is not the first payroll tax deferral the administration has implemented. In March, as a result of the CARES Act, employers are permitted to defer paying their portion of the Social Security tax through the end of 2020. Those who chose to participate in the deferral program can pay back half the taxes by the end of 2021 and the second half by the end of 2022.

What Employers Need to Know

This new payroll tax deferral executive order directs the Secretary of the Treasury to defer (not suspend) the withholding, deposit and payment of the employee portion of Social Security taxes for wages paid from September 1, 2020 through the end of this year. The executive order applies to any employee who is paid less than $4,000 on a pre-tax basis per bi-weekly pay period or the equivalent in other payroll frequencies is $2,000 weekly; $4,333.33 semimonthly; and $8,666.66 monthly.

What’s important to understand is that a tax deferral doesn’t release employees from eventually paying their portion of the relevant taxes. The memorandum says that the payments will be deferred, without any penalties, or interest. Whether the payroll taxes even have to be repaid is a directive for the Secretary of the Treasury to “explore avenues, including legislation, to eliminate the obligation to pay the taxes deferred pursuant to the implementation of this memorandum.”

The mechanics of exactly how the deferral and payment process will work is also up to the Secretary of the Treasurer’s determination along with IRS guidance and he has until September 1 to lock in the details. With the logistical challenges the executive order presents, a hard pivot like this will be difficult, if not nearly impossible, for employers, payroll providers, bookkeepers and accountants to immediately implement.

What’s Still Up in the Air

At this time, we still don’t know if the Secretary of the Treasury will even carry out the executive order. If he does, because the deferral is voluntary, it creates another hoop for employers to jump through. First, businesses have to decide if they even want to participate in the deferral program. If employers do, they need to determine which of their eligible employees want to participate or not.

As the order currently stands, it would be mandatory for those employees who elect deferral to pay back those deferred taxes in 2021. Employers will likely be on the hook to pay the employees’ portion of the deferred taxes if any employee is not able to repay. Another facet to consider is those employees who leave the company between September 1 and the end of the year. What happens with their deferred taxes? Additionally, it’s still unclear how employees would pay back those taxes. Will they be required to pay on their tax returns in April? Will employers be required to hold out extra payroll taxes to cover the deferred amount?

According to new guidance (Notice 2020-65) published by the IRS Friday night, the new due date for repayment of deferred tax is now April 30, 2021. After that date, penalties, interest, and “additions to tax” will begin to accrue. “Affected taxpayers” (i.e., the employer according to the notice) “may make arrangements to otherwise collect the total applicable taxes from the employee,” thereby placing the onus of serving as the tax collector on the employer.

The directive seems to raise a lot more questions than it answers. What happens when an employee defers the taxes and then leaves the company? Will the employer be responsible for the deferred taxes? Will the employee be required to pay when they file their personal taxes?

With so many open issues with the Order and Notice, it is anticipated that some employers may decide to not participate in the deferral until additional guidance is issued.

How Paycor Helps

Paycor’s system now allows employers to opt-in eligible employees to the deferral of employee Social Security tax. If you are a Paycor customer, you can set up a new Employee Social Security deferral by visiting the Tax Credits and Deferrals page and clicking on the new Employee Deferral tab.

If you aren’t a Paycor Customer, talk to a member of our sales team about how our product can help you stay compliant with and take advantage of the latest legislation.