How Will The Recent Executive Order Affect Your Payroll Tax?

As if companies don’t have enough to focus on, our new normal now includes dealing with payroll tax deferment. Tough choices are ahead for many companies as they navigate the deferral and figure out if, when, and how to pay the IRS. The deferral, which the President signed into order effective September 1, has to be paid back by April 2021, and will only hold off on payroll tax until the end of this year.

Here’s what you need to know.

Understand the deferral:

Be aware that this is a deferral of taxes only – not forgiveness. Congress has to intervene to forgive the taxes owed. As an employer, you must withhold and pay those deferred taxes ratably, meaning, proportionally over time — from employees pay between January 1, 2021, and April 30, 2021, or else you will face interest, penalties, and additions to tax, according to recent guidance issued from the IRS. According to the memorandum, companies can stop withholding only Social Security tax (6.2%) from employee wages from September 1, 2020 – December 31, 2020. The payroll tax deferral does not include Medicare taxes. The Social Security tax deferral allows employers to delay employee Social Security tax payments without any penalties or interest until May of next year.

It’s your responsibility:

You are the employer, the onus is on you to participate, and withhold and pay workers’ deferred taxes early next year. Whether it’s the magnitude of the responsibility, the rapid rollout of the IRS guidance, or the complexity of explaining the details to employees, there will be companies that back away from providing what’s called “the holiday” altogether. Will you be one of them?

Employees will feel the hit too:

When you recoup the deferral next year, employees will see the amount deducted evenly from January 1 through April 30, 2021. However, you and payroll providers will need to hash out what might happen to seasonal workers and employees who leave prior to being repaid. If employee(s) changes jobs, you can withhold the full amount deferred from their last check before they go. This could be a substantial amount. It’s your responsibility to make sure employees understand the consequences of this decision, so they are not surprised or taken back by their checks.

Some will not be affected:

The deferral only applies to those making under $4,000 bi-weekly. That means anyone who makes over that will not see a deferral or a deduction of their pay. However, if you have seasonal workers or those who receive bonuses, they could end up in and out of this deduction phase, and that may complicate things for your HR staff as repayments come due.

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