On August 8, 2020, President Trump signed an executive order allowing employers to defer the 6.2% employee portion of Social Security payroll taxes for employees earning less than $4,000 for a biweekly period from September 1st until December 31st of this year. The aim of this order was to put more money in wage earners’ pockets in light of the ongoing COVID-19 pandemic and economic downturn.
Let’s take a closer look at the implications of this order so that you can determine if allowing employees to defer their Social Security taxes is right for your company.
There are two critical points to understand before deciding to defer the collection and remittance of these taxes from your employees. First, this is a tax deferral, not a tax holiday. The amount of Social Security tax deferred between September 1st and December 31st must be repaid to the IRS by April 30, 2021 or interest, penalties and fees will begin to accrue. Those fees and penalties will be associated with the individual employee’s tax account, but the employer is ultimately responsible for the collection and payment of these taxes.
This brings us to our second critical point. The employer is the so-called “affected taxpayer” according to recently released guidance from the IRS. As such, the employer is ultimately liable for remitting these taxes to the federal government. Should you have an employee quit or be terminated during the deferral period, it is the employer’s responsibility to secure payment of the deferred taxes from the erstwhile employee or risk having to pay those taxes themselves.
As the “affected taxpayer” employers have several choices about whether or not they participate in this deferral program. The first option for employers is to simply do nothing. Continue processing payroll as normal and remitting payroll taxes on your monthly or semi-weekly 941/944 schedule. To avoid any confusion or frustration amongst your employees, we suggest being upfront with your staff and explaining your reasons why. (We’ll explain a rationale for not deferring your employee’s Social Security payroll taxes in just a minute.)
The second option for employers is to defer payroll taxes across the board for all employees earning less than $4,000 per bi-weekly pay period (roughly $104,000 annually). You will want to have employees sign an agreement insuring that they will be responsible for repaying the deferred taxes in the event of their termination or leaving the job. We’ve prepared a sample opt-in form and payback agreement for your reference:
The third option for employers is to allow employees to opt in to deferring their Social Security payroll taxes should they so choose. If you choose this patchwork approach it’s important that you document each employee’s choice and, should they opt in to deferring their taxes, make sure that you have a signed agreement for them to repay the deferred amount should they leave your employ.
The most important thing for your employees to know about this program is that they will be responsible for repaying any taxes deferred in the new year. An average wage earner in the U.S. making about $56,000 per year would have an extra $133 in their bi-weekly paycheck if they chose to defer the Social Security tax withholding. While that’s nothing to sneeze at in the near term, come January they will be responsible for remitting the normal amount of Social Security tax plus the deferred amount as well. Similar to spending too much on credit cards at Christmas time, the deferral will hit employees particularly hard in 2021 when, in this hypothetical example, $266 is withheld from every paycheck until April 30, 2021.
Of additional concern for employers is that they are the primary responsible party for collecting and remitting these taxes on behalf of their employees. Should you have to fire an employee and cannot secure their deferred taxes through their last paycheck or some other arrangement, the employer will ultimately have to pay the IRS any amount owed on behalf of the employee.
Every business is unique and your situation regarding the Social Security payroll tax deferral requires consideration for both your employees’ livelihood and your organization’s ultimate liability. If you are currently or planning in participating in the Employee Social Security payroll tax deferral, please contact us at email@example.com to ensure your account is setup correctly to support this.