Payroll Tax Deferral – What this Means to Your Business and Employees

August 24, 2020

In a memorandum issued on August 8th , President Trump has directed the Secretary of the Treasury to defer the employee portion of payroll taxes normally withheld from gross wages, effective for compensation paid from September 1, 2020 through December 31, 2020. The referenced deferral is specifically under IRC 3101(a), which is the Social Security tax levied at 6.2% of wages, and limited to those who earn on average $4,000 per pay period based on a bi-weekly pay period, which is about $104,000 per year gross compensation. The maximum deferral works out to about $2,149 on average. The wording of the memorandum implies that this deferral is available only to those earning under the aforementioned compensation amount; those earning more do not get any deferral at all.

The memorandum does not indicate for how long the taxes may be deferred before repayment is  is required, and further goes on to direct the Secretary of the Treasury to explore ways to permanently forgive the deferral. What is also unclear is how the tax is to be repaid – is the employee required to repay it as part of his/her 2021 individual income tax filing, making this solely an employee issue?  Or is the employer required to withhold it from the employee in 2021, which puts the business on the hook for repayment?

Though there has been talk of legal challenges to this action, thus far none have come to fruition, yet the September 1st implementation date is upon us. Such a deferral is likely to put many employees in quite a bind if required to repay this tax, and the uncertainty of how this will unfold is making business owners uneasy to the point where many have indicated that they will not participate in this tax deferral. Whether a business can opt out of the payroll tax cut is up for debate; each business owner will need to decide for themselves whether this is optional. This is an unresolved  legal question beyond the scope of this article.

While implementing the deferral means the employee sees a modest and temporary increase in pay, which is the only upside, there are two major downsides to consider:

  • Tax cuts can only be made by Congress. Thus, employees will need to bank on Congress passing legislation forgiving this tax.  Without legislation, this tax must be repaid.  It’s not at all likely the employee is saving the payroll tax just in case. This is setting up employees for potential economic hardship, the stress of which spills over into the workplace should there be no forgiveness. Thus, employees should be advised of the amount of the tax deferral per pay period, and to save this money as it will need to be repaid absent congressional action.
  • Employers by statute are responsible for withholding and remitting payroll taxes from the employee. Certain individuals can be held personally liable for this tax if not remitted. Such individuals typically are the business owners, anyone with check signing authority, and anyone who has discretion over the company finances. Without any guidance as to how the tax is to be repaid, it is possible the responsibility will be pinned on the business to withhold and remit the tax in 2021.

As has been the general theme with COVID-19 related matters, much uncertainty swirls around this, as we all continue to wait for Treasury to issue guidance. In the meantime, the business owner should proactively contemplate the consequences of implementing (or not) the payroll tax cut so come September 1st, if there is still no guidance, the business owner has a plan of action.

For questions on this matter, please contact Larry Rubin.