What the Payroll Tax Deferral Means for You and Your Employees
On August 8, 2020, President Trump issued an executive order to allow deferral of the collection and remittance of the employee portion of social security tax for payroll checks dated between September 1, 2020, and December 31, 2020. The employer portion of social security tax and both the employee and employer portions of the Medicare Tax is required to be withheld and remitted to the IRS as usual.
This deferral is applicable to any employee earning less than $4,000 in a bi-weekly period or the equivalent amount for a shorter or longer pay period.
IRS Notice 2020-65 gave some guidance on this issue, but many things are still unclear. At this time, there is no explicit language as to whether or not the deferral is mandatory. It is the general consensus among many payroll service providers that the deferral is optional.
If employers withhold the employee portion of social security tax on checks dated during the deferral period, any withheld taxes must be deposited with the IRS as normal. However, please be aware that you may be required to return the employee's funds on a future paycheck, depending on future IRS guidance.
It is important to communicate to your employees that this is NOT a tax cut (yet) and only a short-term deferral. The employee's deferred portion of social security tax will need to be withheld ratably from employee wages paid between January 1, 2021, and April 30, 2021, on top of the payroll taxes owed during that period.
The employer can also arrange to collect the applicable taxes from their employee if withholding during the re-collection period is not possible. There is currently no explicit guidance on whether the employer would be responsible for covering the underpaid portion of the social security tax before the deadline if the business closes or if the employee is no longer working for them.
We will continue communicating with you on this issue as more guidance is published. If you have any questions, feel free to reach out to our team at ECS Financial Services. We are here to help you navigate these trying times.
About the Author - Kara Ziegler joined ECS in September 2016 and is currently a Senior Accountant. She graduated Summa Cum Laude from Western Illinois University in Macomb, Illinois, in May 2016 with a Bachelor of Business in Accounting and earned the honor of being both the Accounting Departmental Scholar and College of Business and Technology Scholar for the spring 2016 semester. She has been a Certified Public Accountant since September 2017, a Certified Management Accountant since October 2018, and earned the Certified Lease and Finance Professional designation in May 2019. Since joining ECS, she has been involved in various aspects of client service, including lease accounting, auditing, sales tax preparation, and corporate and individual income tax return preparation. She looks forward to expanding her knowledge of the leasing industry as she continues growing with the firm.