Temporary Employee Tax Deferral
The temporary employee tax deferral program is as a result of a Presidential memorandum. On August 8th, President Trump directed the Treasury Secretary to use his authority to defer the withholding, deposit and payment of employees’ portions of Social Security taxes from September 1 through December 31, 2020.
The goal is to put more money in the pockets of workers during the COVID-19 pandemic emergency.
Social Security Tax Withholding Deferred
The temporary employee tax deferral applies to the 6.2% tax on wages or compensation paid for a bi-weekly pay period of less than $4,000 or the equivalent threshold amount for other pay periods. In other words, employees with annual wages up to $104,000 are generally eligible for the deferral.
Just a few days before the start of the deferral period, the IRS has issued some vague guidance regarding the temporary employee tax deferral program. It explained that the due date for withholding and paying Social Security taxes has been postponed. These taxes are now due between January 1, 2021 and April 30, 2021.
This means that Social Security taxes not withheld in the last 4 months of 2020 are to be withheld from employees’ wages during the first 4 months of 2021. Furthermore, in those 4 months, the required taxes on the 2021 wages will be continue to be withheld as well.
Obviously, the temporary deferred withholding will increase employees’ take-home pay in September through December of this year. On the contrary, their winter and early spring 2021 paychecks will be smaller because the Social Security tax withholding will be twice the usual amount.
Assumption: This employee lives in a state without income tax.
An employee is paid weekly and his wages in 2020 are $1,000 per week. Normally, $62.00 in Social Security (6.2%), $14.50 in Medicare (1.45%) and $120 in federal income taxes are withheld from his wages by the employer. The employer adds $76.50 (the employer’s matching amount for Social Security and Medicare tax) before paying the withheld amount to the government. Therefore, the employee’s take-home pay is $803.50.
Under the temporary employee tax deferral arrangement, nothing would be withheld for the Social Security tax. So the employee’s take-home pay for the week would go up by $62.00 for a total of $865.50. The amount transmitted to the government would be $62.00 less per week.
Fast forward to 2021: The employee’s wages are still $1,000. And for as many pay periods in 2020 as the deferral occurred, the Social Security tax withholding in 2021 will be $124. This amount is made up of the amount deferred in 2020 and the regular 2021 withholding. For these pay periods, the take-home pay will be $741.50.
The IRS Notice places the responsibility on the employer to make payment of the deferred payroll taxes by May 1 of 2021. Otherwise, the employer may owe penalties, interest and additional tax.
This may create a problem if an employee no longer works for the same employer in 2021. Obviously, the employer can’t withhold the makeup tax, since the worker has no wages from that employer.
According to the IRS notice, if necessary, the employer may make other arrangements to collect the total deferred taxes from the employee. Unfortunately, it doesn’t specify what those arrangements should or could be.
Whether an employer must stop withholding the Social Security tax from September 1 through the end of the year is NOT addressed in the guidance. Nevertheless, Treasury Secretary Mnuchin is reported to have said that he can’t force employers to stop withholding.
Also not covered is if an employee may decline to have the tax deferred. Some large employer organizations have said is logistically unworkable.
The president has indicated that he would like the deferred taxes permanently forgiven. As it is with all tax matters, it would take congressional approval to change the law. Unfortunately, given the highly charged political climate in Washington, that may not happen.
We strongly advice you to stay away from the temporary employee tax deferral of their social security withholding. It is obvious in so many fronts that this memorandum is more problematic than good. Here is why:
- 1The amount deferred is still due. There is no guarantee for forgiveness (unless president Trump wins a second term, but congress still has to legislate it)
- 2If an employee leaves, whether voluntarily or not, employers will not be able to collect the deferred taxes
- 3Employers are stuck with the nightmare of collecting the deferred taxes, even if all employees stay (what are the chances for the majority?)
- 4Tax filing will be a challenge, though doable.
Overall, this temporary employee tax deferral memorandum is a compliance nightmare and should be avoided at all costs. Send us an email or call us on Thursday or Friday if you would like to discuss further.