Is the New Payroll Tax Deferral a Good Idea?
You may recall that President Trump signed an executive order on August 8 which, among other things, created a payroll tax deferral beginning on September 1, 2020 and continuing through December 31, 2020. As they say, the devil is in the details, so we wanted to share an explanation of the payroll tax deferral including some of its nuances and ambiguities.
The payroll tax deferral relates ONLY to the withholding, deposit and payment of the employee's share of the 6.2% social security tax on wages paid during September 1, 2020 and continuing through December 31, 2020. In other words, employees would not be required to pay their share of the social security tax normally assessed on their wages.
The deferral only applies to employees with bi-weekly pre-tax income of less than $4,000 (annual salary of $104,000). However, the determination of applicable wages is to be made on a pay-period-by-pay-period basis, meaning that if the amount of compensation payable to an employee for a particular pay period is less than the threshold amount ($4,000 for biweekly pay periods), then the payroll tax deferral applies to that compensation, irrespective of the amount paid to that employee in other pay periods.
No forgiveness of the deferred amounts is permitted.
Many question the legality of this executive order and whether or not the President has the authority to order a deferral of this tax without Congressional approval.
Treasury Secretary Mnuchin recently stated that participation in this program is optional for an employer.
Repayment of the taxes is ultimately the obligation of the employer. Repayment of the taxes (through ratable withholding and deposit by the employer) is postponed to the period from January 1, 2021 to April 30, 2021. Interest and penalties begin accruing on May 1, 2021 on any unpaid amounts. Although employers are empowered to “make arrangements to otherwise collect” the taxes due from the employee, no information was provided regarding repayment in connection with employees who leave the employer during the deferral period, nor about employees earning too little to ratably repay the taxes due in the following year.
We hope you found the above helpful. And again, we are available if you have questions, concerns or need assistance.