What Employers Need to Know Before Joining the New Payroll Tax Deferral Program

September 03, 2020

To increase take-home paychecks during the ongoing COVID-19 pandemic, the president’s recent executive order directed the Treasury Department to defer Social Security payroll tax withholding obligations. The Treasury and the IRS just issued guidance to employers on how to implement the payroll tax deferral program, which may start Sept. 1.  

Which employers can use the deferral program?

Any employer required to withhold and pay the employee share of this withholding tax may take advantage of the payroll tax deferral option.

Do employers have to defer payroll tax withholding?

Employers can continue to withhold and remit payroll taxes as usual. Employers are not required to participate, and employees cannot compel them to do so. 

Which employees qualify for payroll tax deferral?

The payroll tax deferral applies to employees with biweekly pretax income of less than $4,000, with each pay period considered separately. Because the eligibility is measured for each pay period, it is possible an employee could be above the $4,000 threshold for one pay period but eligible in other pay periods when their taxable wages are less than $4,000. This deferral option only applies to the 6.2% employee’s share of Social Security taxes. It does not apply to the 1.45% employee’s share of Medicare taxes.

What should employers keep in mind before choosing the deferral option?

If employers elect to defer the withholding and payment of their employees’ payroll taxes:

  • From January 1, 2021, to April 30, 2021, employers must ratably deduct any deferred taxes from the wages paid to employees (in addition to the regular withholding applicable for this period) and remit them to the IRS.
  • If those deductions and payments are not made in this 2021 period, the employers – not the employees – remain liable for remitting any portion of employees’ Social Security taxes which are deferred pursuant to the president’s executive order.
  • In the event employers do not satisfy this liability, they may be subject to penalties and interest which will begin to accrue on unpaid taxes on May 1, 2021.
  • Employers “may make arrangements to otherwise collect” deferred taxes from employees that will not be employed as of April 30, 2021.
  • Employers must evaluate what, if any, arrangements to make with employees who elect to defer taxes. For example, if employees leave employment before the deferred taxes are repaid, employers should consider whether to adopt a policy to deduct the deferred taxes from employees’ final pay to the extent permissible under federal and state law.

Employers should consult with their professional advisors in considering whether to participate in this program. Employers who plan to participate should appropriately educate their employees about the current temporary nature of the deferral and the uncertainty of any potential future forgiveness. 

Please contact Karleen Green, Ryan Moon, Derek Larsen-Chaney or any other member of Phelps’ Labor and Employment and Business teams if you have questions or need compliance advice and guidance. For more information related to COVID-19, please also see Phelps’s COVID-19: Client Resource Portal.