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On August 28, 2020, the Department of Treasury and Internal Revenue Service issued initial guidance on how employers can choose to implement the temporary deferral of some payroll taxes based on the August 8, 2020, Presidential Memorandum.
The IRS has yet to issue final guidance as to the reporting requirements associated with the program. OnPay needs this guidance to be in final form in order to implement the employee Social Security tax-deferral feature. Once relevant guidance is published, we’ll implement the changes in our system.
In the interim, here’s an overview.
Basic details of the deferral program
The payroll tax deferral is optional, and taxes that are deferred would have to be paid by the employer in early 2021.
It applies to wages paid from September 1 through December 31, 2020, for workers who make less than $4,000 per biweekly paycheck (or $104,000 annually). For an employee whose wages vary from paycheck to paycheck, no deferral is allowed when taxable wages exceed $4,000 for a bi-weekly pay period.
Employers that choose to opt in will defer the 6.2% employee portion of wages paid to Social Security.
Employer is responsible for the repayment of deferred taxes
Employers will be required to repay the deferred taxes to the IRS during the first four months of 2021. As a result, employees could see a reduction in net pay in 2021 since repayment withholding would be added to the regular Social Security tax due for any 2021 wages earned during the same period.
For example: If an employer deferred $400 of an employee’s social security taxes in 2020, the employer would have from January 1 to April 30, 2021, to repay the deferred taxes. In a bi-monthly pay schedule, that would mean deducting an additional $50 per check from the employee to collect and pay the full amount deferred in 2020.
Eligibility and obligations
Employers considering whether to defer employee Social Security taxes should be aware of the following:
- This deferral applies to “affected taxpayers” that have been negatively impacted by COVID-19.
- Employers are responsible for withholding and paying back any deferred taxes.
- Employers that fail to pay any outstanding amounts by May 1, 2021, may be held liable for the tax, penalties, and interest.
- If an employee is not employed by the employer for the full four-month deferral period, the employer is still obligated to pay the total deferred taxes to the IRS.
- Employers are permitted, if necessary, to “make arrangements to otherwise collect” the total taxes due from the employee, but the Notice is unclear on how an employer may do so.
What’s next?
Additional guidance is expected from the Department of Treasury and the IRS including reporting requirements associated with the program. A draft revised Form 941 — the quarterly payroll tax return that employers file to report wages paid and taxes withheld from those wages — has been released that would allow employers to report deferred employee payroll taxes.
The complete details of the guidance can be found in IRS Notice 2020-65. We will update this article as additional information is made available.
For more information about how your business can navigate payroll, HR, and benefits through COVID-19, please visit our Resource Center.
This article is for informational purposes only and should not be relied on for tax, legal, or accounting advice. You should consult your own tax, legal and accounting advisors for formal consultation.
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Erin Ellison is the former Content Marketing Manager for OnPay. She has more than 15 years of writing experience, is a former small business owner, and has managed payroll, scheduling, and HR for more than 75 employees. She lives and works in Atlanta.