This is a follow up from our previous blog post here.
On August 8th, President Trump issued a memorandum calling for a temporary payroll tax deferral for the collection of employees’ Social Security payroll tax (6.2%) from September 1 to December 31, 2020. On August 28th, the IRS issued guidance on how and when the deferred taxes would need to be repaid.
The deferral is optional to employers and any employee is eligible if their pretax wages or compensation during any biweekly pay period are less than $4,000. If an employee’s pay is over this amount, no deferral is allowed for that pay period. The determination of applicable wages is to be made for each employee on a pay-period-by-pay-period basis, so an employee may be eligible one pay period but not another depending on their pay. The maximum amount of tax that could be deferred per employee is approximately $2,150.
If the deferral is elected by an employer, withholding and payment of these taxes would need to be repaid starting with the pay period beginning Jan. 1, 2021, and ending April 30, 2021. This means if an employer deferred the withholding, deposit, and payment of these taxes for employees in the last four months of 2020, employees would need to have that tax withheld in the first four months of 2021, in addition to their normal tax withholding – a double withdrawal of social security tax in that timeframe. Interest, penalties, and additions to tax would begin to accrue on any unpaid taxes starting May 1, 2021.
If an employee leaves before the deferred FICA tax is fully remitted to the government, the employer is allowed to withhold the remaining amount out of the employee’s final paycheck. However, if there were not enough wages to pay the tax, the employer may end up being on the hook for the remainder of the tax due.
Employee: More money now vs Less money later
So what’s the advantage of doing this for employees? Employees would have more money in their paychecks between now and the end of the year. The caveat is that employees can expect less money in their paychecks between January 1 and April 30, 2021.
Employer: Minimal advantage and potential cost
For an employer, there does not seem to be advantages to deferring their employee’s payroll tax. It’s expected to take additional time to: determine if each employee’s wages qualify each pay period; prepare 4th quarter 2020 and 1st and 2nd quarter 2021 payroll reports related to these deferrals; keep records of tax deferred and tax repaid; and verify the tax has been repaid in full by April 30, 2020. There is also the possibility of the employer owing the employee and employer’s portion of social security tax on those wages if an employee leaves early.
Recommendation: Skip it!
Wegner CPAs recommends skipping this deferral and to continue business as usual when it comes to payroll. The cost-benefit of delaying withholding and payment four months to have to repay it in the new year does not seem to be in employee’s best interests. We recommend communicating to your employees your choice on this matter in either direction you choose.
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