Payroll Deferral Update: the risks and benefits of employers’ options

August was a busy month for payroll. On August 8, President Trump issued an executive order allowing employers to defer withholding and payment of certain employee portions of Social Security taxes. Roughly three weeks afterwards, the Department of the Treasury and the IRS issued Notice 2020-65, which implemented the executive order. Today’s post will discuss the big picture and employer considerations.

Deferral is Optional for Employers

Employers may choose to defer the withholding, deposit and payment of certain employees’ 6.2% Social Security tax for wages paid between September 1, 2020 and December 31, 2020. There are no negative repercussions for employers who choose to opt out of the program.

Employees eligible for deferral must have wages or compensation less than $4,000 payable during any bi-weekly pay period. Any amount that is deferred would be withheld and deposited ratably from wages and compensation paid from January 1, 2021 through April 30, 2021.

Employer Considerations

Any employer who chooses the deferral approach must carefully weigh the costs associated with compliance as well as the potential liability of ultimately being responsible to pay back the deferred taxes. For example, if an employee leaves, the employer needs to find a way to collect and pay the tax. For those employers who fall short of paying the deferred taxes back by April 30, 2021, they will be subject to penalties and interest on the unpaid amount.

From an employee relations standpoint, employers should carefully communicate to employees how this program works. For example, while the deferral of tax would lead to more take-home pay now, it will likely lead to less take-home pay beginning January 1, 2021.

Each employer should carefully weigh the pros and cons before implementing this program. Farm Credit East’s payroll team is standing by to help address any questions that may arise as you carefully consider your options.