Is the Temporary Deferral of Employee Payroll Tax Worth It?

Article Highlights

Withholding of Social Security Tax Deferred
IRS Guidance
Employer Responsibility
Unresolved Issues

President Trump issued a Presidential Memorandum on August 8, 2020, that directs 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. The 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 guidance explaining that the due date for withholding and paying Social Security taxes has been postponed; they 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 ratably withheld from employees’ wages during the first 4 months of 2021, along with the required withholding on the 2021 wages. So, deferred withholding will increase employees’ take-home pay in September through December of this year, but their winter and early spring 2021 paychecks will be smaller because the Social Security tax withholding will be twice the usual amount. For example:

An employee (who lives in a state without income tax) is paid weekly; 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, who adds $76.50 (the employer’s matching amount for Social Security and Medicare tax) before paying the withheld amount to the government. Thus, the employee’s take-home pay is $803.50. Under the 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 to $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, made up of the deferred 2020 withholding and the 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 as in 2020. 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, but it doesn’t specify what those arrangements should or could be.

Not addressed in the guidance is whether an employer must stop withholding the Social Security tax from September 1 through the end of the year (although 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 (which some large employer organizations have said is logistically unworkable).

The president has indicated that he would like the deferred taxes permanently forgiven, but it would take congressional approval to change the law, and given the highly charged political climate in Washington, that may not happen.

If you have questions about the payroll tax deferral and how it would affect you, please give this office a call.

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