IRS Issues Employer Guidance for New Payroll Tax Deferral

In early August 2020, President Trump signed executive orders to provide aid during the ongoing coronavirus crisis. Among the orders was a payroll tax deferral, which the IRS recently clarified in new guidelines. Find out how it might impact teams around the country.

What is the Payroll Tax Deferral?

President Trump signed several executive orders on Saturday, Aug. 8, 2020, to provide temporary relief in lieu of a new COVID-19 bill. Included in these orders was a payroll tax measure that announced employers could defer the employee-paid portion of required Social Security taxes.

An article in SHRM said that for these employees, Social Security taxes "will be deferred without any penalties, interest, additional amount or addition to the tax." The tax holiday is not mandatory.  

How Does the Payroll Tax Deferral Work?

On Aug. 28, 2020, the IRS issued further guidance on President Trump’s executive order concerning the payroll tax deferment. 

In summary, the guidance allows employers to “defer withholding and payment of the employee's portion of the Social Security tax” if an employee is paid less than $4,000 before taxes each bi-weekly pay period. No deferrals are available to employees who receive payments that exceed this amount. 

Notice 2020-65 applies to wages paid by employers beginning Sept. 1, 2020, and running through Dec. 31, 2020. These taxes are deferred, not forgiven—meaning the payroll taxes must repaid between Jan. 1, 2021, and April 30, 2021. 

Read the full memo here.

What Does This Mean for Employers?

Before the executive order, employers and workers each paid half of the required 12.4% Social Security tax set for each employee. Now, according to analysis from Forbes, “employers may choose to refrain from withholding the 6.2% from employees for Social Security.” These companies are still required to contribute their half of the required Social Security tax if they opt to defer employee payroll taxes.

The same Forbes article proposes that Congress may decide to “permanently forgive the deferred payroll taxes.” Only time will tell if this is the case. But for the time being, employers and employees should approach the guidance as issued. 

A different article published by SHRM indicates that because employers are responsible for repaying taxes in 2021, they could “withhold extra amounts from employees' paycheck from January through April 2021 to make up for taxes unpaid during the suspension period.” If an employee is laid-off or leaves the company, employers can deduct any amount owed from their final paycheck or eat the cost by paying the balance owed. 

With this in mind, employees who use the tax deferral must know exactly how the deferment impacts their paychecks. Consider issuing a communication to these individuals to explain that while wages may see an increase through the end of the year, they’ll still be required to pay the deferred taxes in the near future. 

The result? A bigger paycheck now in exchange for a smaller one beginning in January 2021.