On August 8th 2020, the President issued an executive order regarding deferral of payroll tax obligations in light of the ongoing Covid-19 disaster (“the Order”). The order was given to the Secretary of the Treasury, giving him the authority to defer the withholding, deposit, and payment of certain payroll taxes from employees.
What is known:
- The collection of the 6.2% employee only portion of the social security payroll tax can be deferred. (This does not include the employee’s portion of Medicare Tax).
- Deferral is available from Sept 1, 2020 to Dec 31, 2020.
- Repayment of the deferral is to be done ratably from Jan 1, 2021 to April 30, 2021
- Limitation on the amount eligible
- The order limits the deferral to the tax on an individual employee’s salary of $4,000 bi-weekly ($104,000 annualized). IRS guidance stipulates that this is on a pay-period basis, such that any excess over the $4,000 in one pay period may not be used to supplement the wages in another pay period.
What is not known:
- Who has the option to initiate the employee’s deferral of social security?
- Employer – most evidence we currently have, including statements from the Treasury Secretary, is that the employer has the option to defer withholding; no employer is required to make this available to their employees.
- Employee – it appears that if an employer makes the deferral available, then the employee can decide whether to defer or not.
- Employer risk related to failed repayment
- Penalties and interest begin May 1st. These are assessed to the employer, not the employee
- Any penalties and interest will be charged to employers.
- The employer appears to bear responsibility for ultimate payment of the deferred tax. Guidance provided specifies that an employer may take steps to collect the tax from the employee; however, in the event an employee quits or is terminated, it is unclear how an employer may collect the deferred tax from the employee.
- No guidance is given on whether employers would get relief if they cannot collect the deferred tax from an employee
A lot of the details regarding implementing the deferral option are still unknown. Many payroll providers are not ready to handle these deferrals. Absent further guidance, it seems like an overly cumbersome task to offer this to employees. WSW will continue to monitor for updates, including clarification of employer and employee options and other details of implementation.
If an employer elects to allow these deferrals, we would recommend that all employees who were to elect to defer their social security sign an agreement with the employer allowing for an offset of the employee’s wages if the employee were to leave employment before the deferral has been repaid in full.