What every employer should know about Payroll Tax Deferral
Dear Clients and Friends,
Last month, an executive order was signed deferring a portion of payroll taxes. This means that employers can opt to not withhold certain taxes from their staff compensation for the rest of this year. For the employees, it means that they will get more take‐home pay now on the understanding that the sums not withheld now will be withheld from their pay at the beginning of next year. Last week, the IRS issued much‐anticipated guidance on how this will work in practice.
Under the CARES Act, employers have already been able to defer the deposit and payment of the employer’s portion of Social Security taxes for the period from March 27 to December 31, 2020. Half of those sums will be due on December 31, 2021, and the remainder on December 31, 2022.
The time period for deferring employees’ contributions is more truncated. The guidance says employers can defer the withholding, deposit, and payment of certain payroll taxes on wages paid from September 1 through December 31, 2020. The due date for withholding and payment of these taxes is postponed until the period beginning January 1, 2021 and ending April 30, 2021, during which period the sums must be repaid ratably.
Moreover, the deferral applies specifically to the employee portion of the Old‐ Age, Survivors, and Disability Insurance (OASDI) tax, which amounts to 6.2% of employees’ pay. Medicare Tax (1.45%) is not part of the deferral and will still need to be withheld as usual.
This deferral is applicable for any employee whose pre‐tax wages or compensation during any biweekly pay period generally is less than $4,000, or the equivalent threshold amount with respect to other pay periods. To be clear, this means someone who makes over $4,000 every two weeks is not eligible for deferral. If their income fluctuates from week to week, the determination of applicable wages is made on a pay period‐by‐pay period basis. Anyone making over $104,000 annually, however, is not eligible.
The IRS is aware that employers will not have implemented the deferral by September 1, so the deferral may be put into effect after that date on a prospective basis. Our payroll service providers are working on updating their platforms to accommodate our clients that elect to defer. It should be noted, however, that if the payroll has already run with taxes withheld, payroll service providers cannot retroactively apply the deferral.
It is also important to note that under the Treasury Notice, the employer remains liable for employment taxes. If an employee separates, the employer will still be responsible for submitting the deferred taxes by April 30, 2021, and it will be their responsibility to try and collect the money from the separated employee. We await additional guidance on this matter. Further, if an employer fails for whatever reason to withhold and pay the total deferred taxes by April 30, 2021, interest, penalties, and additions to tax will begin to accrue on May 1, 2021, with respect to any unpaid deferred taxes.
There has been a lot of speculation on whether the deferred taxes might be forgiven, but at this point there is no forgiveness and it appears unlikely that Congress would approve this. Nevertheless, we cannot guarantee it will not happen, so employers should be aware this remains an unknown. We also await guidance on whether tax deferral will be made available for the self‐employed.
Employers who wish to offer this deferral option should ensure their employees understand the details of the deferment, including the future implications, and knowingly make an affirmative election to take it. We can provide our clients with the notice they will need to accomplish this so that everyone is on the same page.
At CJBS, we will continue to monitor these changes and provide any updates as new guidance is developed for this executive order. As always, if you have any specific questions regarding your situation, we are here to help.
Stay safe and healthy,
The CJBS Team