On the evening of August 28, 2020, the IRS issued official guidance on the 2020 payroll tax relief. Up until this point, the memorandum issued by President Trump on August 8, 2020 caused confusion and concern among accountants and businesses.
The IRS guidance allows employers to defer withholding on affected employees’ compensation during the last four months of 2020 and then withhold those deferred amounts during the first four months of 2021.
Designed to provide economic relief during the pandemic, the President’s memorandum allows employees to defer Social Security payroll taxes (6.2% only, not 1.45% Medicare Tax) from September 1, 2020 through December 31, 2020. For our railroad clients, this is also applicable to the employee’s portion of the Tier I tax (6.2%).
It is important to note this is not an exemption from the payroll tax, but a deferral.
If employees are eligible for the deferral and opt to take part, they are expected to pay back the deferred taxes ratably from their wages and compensation paid between January 1, 2021 and April 30, 2021. After this point, deferred payroll taxes not paid, will begin to accrue interest and penalties on May 1, 2021.
Employers are allowed to defer withholding, deposit, and payment of the employee’s portion of Social Security tax on wages that are less than $4,000 during a bi-weekly pay period.
Each pay period is to be considered separately. This means that if the amount of compensation payable to an employee for a particular pay period is less than the threshold amount ($4,000 for biweekly pay periods), then the payroll tax deferral applies to that compensation, irrespective of the amount paid to that employee in other pay periods. Employees earning taxable wages of $4,000 or more during a bi-weekly pay period are not eligible for the deferral.
The choice to defer withholding, deposit, and payment of the Social Security taxes is optional for employers and eligible employees.
“Employers should be very clear with employees, that they understand this is a deferral and not forgiveness,” said Nicole Teska, CPA, CCE. “These amounts will need to be paid back beginning January 1, 2021 with each paycheck. Therefore, when people tend to start paying off their Christmas debt in January 2021, there won’t be the extra cash this year to do that.”
If employers implement the program, here are things to consider:
- Make sure you inform employees that it is expected that deferred Social Security taxes will have to be paid back between January 1 and April 30, 2021.
- Have employees sign a contract agreeing to additional withholding up to twice the normal amount of Social Security taxes in the period from January 1 through April 30, 2021.
- Include in the employee contract the agreement that the employee will reimburse the employer for any deferred payroll taxes should the employee leave the company prior to such a time when all deferred payroll taxes have been repaid.
- Have a plan in place to account for repayment of deferred payroll taxes should the affected employee be earning less in 2021 than he or she earned in 2020.
- Make sure your payroll team or payroll provider understands its obligations for adjusting paychecks to reflect the deferral and then, next year, adjusting paychecks to repay the deferred amount.
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Disclaimer: To ensure compliance with requirements imposed by the Department of Treasury, we inform you any U.S. federal tax advice contained in this document or video is not intended for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter that is contained in this document.