Businesses throughout the United States have been negatively impacted by the COVID-19 pandemic. Businesses of all sizes have been forced to close, reduce hours of operation, or lay off employees. In response to these concerns, several state and federal programs were implemented to provide relief to both businesses and individuals. In addition, a presidential order was issued to allow employers to defer certain payroll taxes.
Payroll Tax Deferral Programs
It’s important to understand that there are two different types of payroll tax deferral programs:
Payroll tax deferral for employers
The Coronavirus, Aid, Relief and Economic Security Act (CARES Act) allowed employers to defer payment of the employer portion of Social Security taxes (6.2%) for any payroll paid between March 27, 2020, and December 31, 2020. Eligible employers using this program will have until December 31, 2021, to pay 50% of the deferred employer taxes, and the remaining 50% is due on December 31, 2022.
Payroll tax deferral for employees
This refers to the payroll tax guidance that permits the deferral of the employee portion of Social Security taxes. On August 8, 2020, the White House issued a Memorandum on Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster. The Memorandum directed the Department of Treasury to act under its emergency authority to issue guidance that would allow employers to defer the withholding and payment of the employee portion of Social Security taxes.
On August 28, 2020, the Internal Revenue Service acted under the authority delegated to the Department of Treasury and published guidance under Notice 2020-65 (“Notice”). The Notice provides that employers may defer withholding the 6.2% employee portion of the Social Security tax for certain wages paid to employees between September 1, 2020, and December 31, 2020.
Additional Tax Guidance
Although the Notice has provided some guidance, there are still unanswered questions about the implications of deferring payroll taxes. Here is what is known about the payroll tax deferral for employees:
1. Not all employees are eligible for payroll tax deferrals.
An employee is eligible if the amount of wages or compensation paid for any biweekly pay period during the deferral timeframe is less than $4,000. If the employee earns in excess of the $4,000 threshold, they are not eligible for the deferral for that pay period.
2. Employers are not required to defer payroll taxes.
The IRS notice doesn’t specifically state that participation is optional but it left the door open for employers to continue to withhold and remit payroll taxes as usual.
3. Deferred taxes have to be repaid between January 1, 2021, and April 30, 2021.
The employer is responsible for collecting the deferred taxes from the employee and depositing any amounts that have been deferred. Therefore, employees who benefited from the deferral will have additional payroll taxes withheld during the first four months of 2021. If deferred taxes are not fully repaid by April 30, 2021, significant penalties and interest could be assessed.
4. Which payroll taxes can be deferred?
The term payroll taxes can include several things. For this purpose, only the 6.2% employee portion of Social Security tax can be deferred.
5. What happens if an employee leaves?
If an employee quits or is terminated prior to repaying all of their deferred payroll taxes, the employee and employer are still responsible for repaying any deferred taxes. This issue may be complicated by state-specific tax codes and employment laws. The IRS has offered no specific guidance about how employers are allowed to collect deferred tax payments from an employee after employment is terminated.
6. What is the likelihood that deferred tax payments will be forgiven?
Forgiveness of deferred payroll taxes can only be accomplished through federal legislation. Although there has been some discussion around this topic, employees and employers should not assume that deferred taxes will be forgiven.
Get Tax Guidance from Professionals
Whether your business participated in the payroll tax deferrals for employers, employees, or both, it’s important to understand how these programs impact your taxes. Employers need to account for the timing of the income tax deductions for any payroll tax deferrals in year-end tax planning.
For some employers, the cash flow benefit of utilizing the full deferral will outweigh the benefits of deducting in 2020 instead of 2021. Those who opt for an early repayment should be aware of potential administrative challenges.
To learn more about how payroll tax deferrals will impact your tax returns, it’s important to consult with an experienced tax professional.
Orcutt & Company is a full-service financial solutions provider. Our comprehensive service plans are designed with the small business owner in mind. We can handle your bookkeeping, payroll, corporate and personal taxes in one office, with one point of contact.