Update – 09/08/2020 – During a monthly payroll industry teleconference, on Sept 3rd, the IRS clarified that deferring the employee portion of Social Security tax is optional. “Employers may, but are not required to utilize the relief.” If an employee wants their portion of Social Security tax to be deferred but the employer does not want to implement the deferral, the employer would not be obligated to implement the deferral.
On August 8, President Trump signed an executive order calling for a deferral of the employees’ portion of the Social Security payroll tax. At this time, Datatech will not be implementing any software changes to accommodate a deferral of payroll taxes. Below we will discuss the guidelines recently issued by the IRS and issues with this program.
Under the order, employees whose weekly pay is less than $2,000 on a pretax basis can defer the tax for the period of September 1 through December 31, 2020.
Again, this is only a deferral. It is not forgiveness of the tax owed.
Employees with a deferral would see smaller paychecks early next year as employers withhold and pay the deferred amount to the IRS. Any deferred taxes are to be repaid by the company between January 1 and April 30, 2021. Any unpaid taxes will have interest, penalties, and additions that start accruing on May 1, 2021.
CalChamber recently posted several unanswered questions about this order:
• Is the payroll tax deferral voluntary for the employer or employee?
The notice makes clear that the employer is the affected taxpayer. While the notice does not explicitly say it is voluntary for the employer, it also does not make it mandatory. The notice makes no mention of nor seems to contemplate the employee making the election to defer. Therefore, this would appear to be a decision left to the employer.
• What happens if an employee no longer works for an employer once the deferral is over? Is the employer responsible for the unpaid taxes?
The notice implies that the employer is responsible for the deferred taxes but provides that the deferred taxes are to be withheld from employees beginning in January. The notice goes on to state, “If necessary, the [employer] may make arrangements to otherwise collect the total Applicable Taxes from the employee.” But the notice provides no further guidance as to what this might mean. It also provides no guidance on what happens if the person is no longer an employee and the employer is unable to collect the unpaid taxes.
• Must an employer decide by September 1 whether to defer withholding or not?
The notice is silent on whether an employer must defer the withholding for the entire deferral period (September 1 to December 31) or whether an employer can start deferring at any point during the deferral period.
As mentioned above Datatech is not making any program changes to handle the deferral of social security payroll taxes. If the employee is no longer employed during the repayment period, the employer would be responsible for the payment of the deferred taxes. Additionally, as the CalChamber indicated, the order does not make the deferral mandatory, so employers can decide not to offer employees the deferral.
Federal Form 941 Filers – The IRS has released a draft of a new 941 form to accommodate this deferral. 941 filers will need to wait to file their 3rd quarter report until the form is finalized and updated in their Datatech software. We will post more information on this when available.