The Payroll Tax Deferral: An Employer's Dilemma

Should employers allow employees to defer payment of their social security taxes based on the executive order?  

Of course, my first response is to say no way!  Employers are the ones who will be stuck with the bill if employees don’t pay or are no longer employees. Employees will not be happy about paying taxes when the bill comes due or doubling up on tax payments in 2021. Employees might not be able to set aside the funds to help pay the taxes back! What is the whole purpose of the deferral? Maybe to make a .02% interest on the savings for 4 months? Nevertheless, there are many things to consider.

Here are the facts:

  1. Employees can defer the social security portion (6.2%) of their payroll taxes due from 9/1/20 to 12/31/20 (The Deferral Period.)

  2. Employees will be required to pay back  the deferral during the first 4 months of 2021 - Jan 2021-April 2021 (Repayment Period) through extra withholding on paychecks.

  3. Even though the tax is the employee’s portion, the employer will be subject to penalties for any unpaid taxes after April 30, 2021.

  4. There is a slight (very very slight) chance the deferred payroll taxes will be eligible for forgiveness, if Congress agrees and votes to make the deferred payments eligible for forgiveness.

  5. We are not yet sure if employer’s can elect to opt-out entirely.

  6. We don’t know how employees make an election to defer the taxes.

  7. We don’t know how employers would collect the deferred taxes if an employee leaves or is fired.

I recommend that employers opt-out, but am also waiting for further guidance. The IRS guidance that came out on August 28 gave very little information about how employers can implement this new Executive Order. 

For your PPP loan applications - there is nothing to do right now. Sit tight.

If you have questions, please don’t hesitate to reach out to the Sherwood Tax team.

Kristen Keats