While Congress and the Administration continue debating the next round of economic relief in response to the continuing COVID-19 pandemic, President Trump issued a memorandum in early August directing the Treasury Secretary to defer the withholding, deposit and payment of employees’ payroll taxes. In lieu of another stimulus check, employees have the option to defer the 6.2% social security (OASDI) tax for wages and compensation paid between September 1 and December 31, 2020. The memorandum also directs the Treasury Secretary to explore avenues to provide forgiveness for the taxes deferred. At this time, the deferred taxes are not forgivable loans, and are all due to be collected and paid in early 2021.
NOTE: This deferral is separate from the Section 2302 of the CARES Act that allows employers to defer the deposit and payment of its share of Social Security taxes until December 31, 2021 and December 31, 2022.
Conditions and guidance
Deferral is available for employees with bi-weekly compensation that does not exceed $4,000 on a pre-tax basis, which is the equivalent of $104,000 annual salary. The deferred amounts are not subject to penalties, interest or additional taxes, which essentially makes them an interest-free loan to employees. Notice 2020-65 directs the deferred amount to be withheld from wages paid between January 1 and April 30, 2021, in addition to the normal tax withholdings during that period. The guidance also provides employers with the flexibility to “make arrangements” for collecting deferred taxes from employees terminated before repayment of the deferred taxes.
Considerations for employers
There is no obligation for employers to offer the option to defer their employees’ OASDI. Before deciding whether to offer employees the option to defer payroll taxes, consider the implementation costs and whether your organization is in economic distress and/or expects a number of terminations before repayment is due. It is also worth noting that the employer is responsible for the repayment of deferred payroll tax. Failure to repay deferred taxes by April 30, 2021 could result in interest and penalties for the employer.
What should your organization do?
The answer is – it depends. After considering the implementation cost and risk associated with repayment, employers should also consult their liability carrier before making a decision about payroll tax deferral. Employers should also clearly communicate their policy and help employees make prudent financial decisions. Deferring payroll taxes now will provide employees with more take-home pay in the short-term, but OASDI will effectively double between January 1 and April 30, 2021. While employees may feel they have received a raise for the end of 2020, that raise may feel like a pay cut in 2021 once repayment begins.
It is important to carefully consider all of these factors before deciding whether to take advantage of the payroll tax deferral. For more questions about the guidance or your organization’s decision, contact your CPA.
Pamela Harrison, CPA
Outsourced Accounting & Advisory Services