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Employee Payroll Tax Withholdings - Deferral

September 09, 2020

By: Barry Dorans

In response to the COVID crisis, a number of proposals have been suggested to assist the economy. In particular, President Trump suggested that the employee’s share of the payroll tax be eliminated during the negotiations concerning the extension of unemployment benefits. Members of both houses and both parties failed to support that idea. On August 8, 2020, President Trump signed an Executive Order allowing employers to postpone withholding and paying the employee’s share of the social security tax if the employee’s wages are below a certain level. The IRS has issued Notice 2020-65 providing further details of how that would go into effect. Employers need to seriously consider how to react to this Executive Order and Notice.

By way of background, employers are required to pay a social security tax, typically 6.2% of wages up to $137,000. Employers are also required to withhold the same amount from the employee’s compensation and pay that tax to the Federal Government. The 6.2% that is deducted from the employee’s pay is called the Employee’s Share. The Notice states that the employer’s obligation to withhold and pay the Employee’s Share for the 4th quarter of 2020 (September 1, 2020 through December 31, 2020) is deferred as to employees whose compensation for any bi-weekly pay period is less than $4,000 (pro-rate if paid other than bi-weekly). While that amount is deferred, the Executive Order does not forgive that tax. Instead, it must be paid by the employer during the 1st quarter of 2021 should an employer defer payment. 

If you defer, your employee’s take home pay will go up as much as 6.2% from the third quarter of 2020. While that may be a good thing for employee morale, there are some very significant downsides.

Unless Congress votes to cut the tax or forgive it entirely, as of January 1, 2021, the employer will have to withhold for the last quarter of 2020 and also for the 1st quarter of 2021. That will cause the take home pay for the employee to go down 12.4% from December of 2020. Although few employees will complain about their take home pay going up during the last quarter of 2020, a 12.4% decrease in take home pay in 2021 could certainly cause some negative feelings from your employees. If an employee is offered equivalent pay by another employer, they can quit and work for the other employer and get a 6.2% increase in take home pay since the new employer cannot double withhold in 2021. Even if they do not leave to go to another job, the employee may resign, be fired, or be furloughed, or for some other reason the employee may not stay on your payroll through the expiration of the second quarter of 2021. In that event, the employer is still required to pay the Employee’s Share for the last quarter of 2020 but would not have the ability to withhold the tax from the employee. Thus, the employer will have to pay the tax with its own funds. While the Notice from the IRS states that employers can “make arrangements to otherwise collect” the taxes from the employee, it would be difficult to do when they are no longer working for you.

Accordingly, think long and hard whether you wish to defer withholding and payment of this tax. While the Executive Order and Notice postpone the due date, neither prohibits an employer from following its typical practice of withholding and paying the Employee’s Share of social security tax from each paycheck as it has done in the past.