Guidance on the Presidential Memorandum related to the deferral of certain payroll taxes was released late Friday. While this guidance still leaves many open questions, here are the key points:
- An employer is allowed to defer the withholding and paying of an eligible employee’s portion of the Social Security payroll tax. Therefore, offering the deferral is optional to the employer.
- The tax deferral option is applicable to wages paid between September 1 and December 31, 2020.
- The deferral applies only if the amount of such wages or compensation paid for a given employee for a bi-weekly pay period is less than the threshold amount of $4,000, on a pre-tax basis, or the equivalent threshold amount with respect to other pay cycles. This determination is made on a pay period-by-pay period basis.
- Taxes that have been deferred must be remitted by the employer between January 1 and April 30, 2021. Penalties will be assessed starting May 1, 2021 for those amounts not repaid.
- Without additional legislation to forgive the deferred taxes, the employer is still responsible for any deferred amounts. The guidance notes the employer may make arrangements to otherwise collect the tax from the employee.
- A revised draft of Form 941, Employer’s Quarterly Federal Payroll Tax Return, was released which includes a line for the deferred amount of the Social Security tax.
Proceed with Caution
We recommend employers and employees who are considering this deferral proceed with caution. Without legislation, this may leave a heavy tax burden on the employee and/or employer in 2021. We also recommend that employers evaluate their payroll and accounting systems to determine the best way to record and track taxes deferred by each employee. As always, maintaining good documentation of employee elections and other communications with employees regarding payroll-related matters is imperative.
If you have any questions about the payroll tax deferral, please contact us.