Payroll Tax Deferral

As details about the Payroll Tax Deferral are released, we will update this page to provide further guidance:

August 28, 2020:  We have finally received an update from the Treasury and the IRS.  They haven’t really clarified much, but it appears that the burden of paying the tax next year (assuming it is not forgiven) will be placed on the employer.  So if your employees are not there to re-collect the tax next year, it appears the employer would need to foot the bill.

The IRS notice requires affected employers to withhold and pay the deferred taxes from wages and compensation paid during the period between Jan. 1, 2021, and April 30, 2021. Interest, penalties, and addition to tax will begin to accrue on unpaid taxes starting May 1, 2021. The notice says, that, if it is necessary, employers can “make arrangements to otherwise collect the total Applicable Taxes from the employee” but does not provide details on that requirement.

Let’s look at the scenario in actual dollars:  a worker making $75,000 a year would get nearly $179 more every two weeks through the rest of this year. But that same worker would owe about $1,610 next year. A worker making $35,000 would get about $83 more biweekly the rest of this year, and owe just over $750 next year.

The latest guidance:

https://www.irs.gov/newsroom/guidance-issued-to-implement-presidential-memorandum-deferring-certain-employee-social-security-tax-withholding

https://www.journalofaccountancy.com/news/2020/aug/irs-payroll-tax-deferral-guidance.html

Our Analysis:  This deferral presents a risk if you have unrelated employees in your company and I don’t recommend implementing it in this case.  But I have a few options you may want to consider:

1. If the owners are the only employees of the business, I do recommend taking advantage of the deferral.  You would need to budget that this amount may need to be paid back next year, but there is a chance that it could be forgiven.
2. If you would normally give bonuses to your employees at the end of the year, you could substitute this deferral as part of that bonus.  You could offer employees take the deferral now and if the deferral is not forgiven, you will pay the payroll tax burden for them next year. It does not appear this would count as “compensation” from the analysis I have seen so far.  If the tax is forgiven, you could pay them a normal bonus or make other arrangements when that forgiveness is approved.

August 20, 2020: Payroll Tax Deferral as of 08/20/2020

August 8, 2020:  President Trump issues a Memorandum on Deferring Payroll Taxes

Many questions surrounding the implementation of this deferral are referred to the Treasury Department to provide guidance.

Donna Bordeaux, CPA with Calculated Moves

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