In the absence of any new Coronavirus aid legislation, on September 1, 2020, President Trump’s Executive Order went into effect. This means employers may suspend the withholding of the 6.2% Social Security payroll tax, normally deducted from an employee’s paycheck, for employees earning less than $104,000 per year, from wages paid during September through December 2020.
- Payroll Tax Deferral Period: September 1, 2020, through December 31, 2020.
- Deadline: Employers must decide before the end of September 2020 if they will participate.
- Participation: Employers elect whether or not to participate.
- Commitment: An employer that makes the election to defer payroll taxes is locked in through the end of December 2020.
Is the Payroll Tax Deferral a Trojan Horse or True Relief?
The Payroll Tax Deferral is simply that: a deferral, and not forgiveness. This means that any taxes deferred from employee paychecks in 2020 will have to be reimbursed, by the employee, in 2021. This will mean a doubling of employees’ first quarter payroll tax payments. Other potential negative implications for employers are even more complicated.
To understand the significance, we need to review FICA. It stands for the Federal Insurance Contributions Act and is the Social Security Tax deducted from each paycheck. A Social Security number accurately records covered wages, which determine what an employee receives at retirement. As someone works, FICA taxes are matched by the employer. For each $1000 of gross pay, an employer sends $124 for FICA to the federal government: $62 from the employee and $62 from the employer.
Since the employer is the tax collector, it guarantees the government will receive payment whether or not the tax is collected from employees in 2020. Employers are responsible for withholding and paying any deferred taxes next year. Specifically, employers “must withhold and pay the total Applicable Taxes that the [employer] deferred under this notice ratably from wages and compensation paid between January 1, 2021 and April 30, 2021 or interest, penalties, and additions to tax will begin to accrue on May 1, 2021, with respect to any unpaid Applicable Taxes.” The deferral does not apply to the employer matching FICA. The employer still pays their $62.
To simplify even further, the employer is loaning $62 for every $1,000 of gross wages to the employee for the next four months. Then the employee must repay the loan during the first four months of 2021 in addition to paying the taxes due then. In other terms, for January, February, March, and April, the amount withheld will be double, or $124, to keep taxes current and repay the loan. A bright spot for employers is the Executive Order does not provide a right for employees to demand that an employer participate in the deferral.
If the employee leaves employment before paying the taxes, the employer must pay the tax. The employer may make arrangements to collect the unpaid tax from the employee (possibly from the last paycheck), but this may present a financial hardship, which could result in the employer not being able to collect the unpaid tax from the employee. Bottom line, whether the employer can collect the unpaid tax from the employee or not, the employer must pay the tax.
Fortunately, an employer has the choice to participate or not in the tax deferral. Understanding all the variables will undoubtedly aid companies in making a decision and managing the path they choose in a way that will best serve their employees and their businesses.
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