On August 8, 2020 President Trump put into action a payroll tax relief for employees with taxable wages that are less than $4,000 during a bi-weekly pay period through an executive order. Employers are able to defer withholding, deposit and payment of the Social Security taxes on those wages during the period of September 1, 2020 through December 31, 2020. This is not an exemption of the tax, but strictly a deferment. These deferred taxes will need to be paid back during the period of January 1, 2021 through April 30, 2021. The executive order mentions that the Secretary of Treasury is to explore options to eliminate the obligations altogether, however that seems unlikely and that the deferral is where things will stand. On August 28, 2020 the Treasury and IRS issues Notice 2020-65 with further guidance for employers.
We at MACKEY have taken an in-depth look and recommend that businesses continue to withhold the normal level of taxes and do not initiate a tax deferral for the following reasons:
- Enacting this deferral would require a lot of planning and documentation to set up. In order to protect yourself, you would want to have the employees sign a contract agreeing that the Social Security taxes would increase during the 2021 period mentioned above and will be paid back even if the employment ends for whatever reason. You will also need to communicate with your payroll provider to ensure that everything is adjusted correctly for both periods. With these changes being enacted so quickly, there is an increased chance of human error and miscalculating the adjusted payroll amounts.
- Many employees in our country live paycheck to paycheck and need every dollar to maintain their livelihood. If the taxes are to be paid back at a higher level in 2021, this means that employees will receive a lower net paycheck during that period. This could provide a strain on the employee’s personal finances and could create major issues.
- If an employee no longer works for you and their final paycheck is not enough to cover the outstanding balance of the deferred taxes, then the employer can be left on the hook for paying the taxes. Even with a contract in place as mentioned earlier, the employer could have to resort to civil action to collect the balance from the employee. This could require legal costs that the employer would have to pay to pursue this option. Either way, this would mean additional expenses the employer would pay out of their own pocket.
If you have any questions over the payroll tax deferral and how it applies to you, feel free to call MACKEY at 859-331-7755. We understand that navigating these times can be difficult and we are here to help!