COVID-19: Payroll Tax Deferral, To Withhold or Not to Withhold – That is the Question!

On August 8, 2020, the President issued an Executive Order that permitted the delay of withholding and reporting the employee share of social security payroll taxes. On August 31, 2020, the IRS issued corresponding guidance.

Specifically, employers may delay withholding social security payroll taxes for pay dates occurring between September 1, 2020 and December 31, 2020. Tax deferral is only for employees whose wages or compensation paid for a bi-weekly pay period is less than $4,000 (excluding certain pre-tax wages, like those subject to a Section 125 plan), or the equivalent amount with respect to other pay periods. Employees may qualify for the deferral on a pay period-by-pay period basis. The amounts that are not withheld during this period must be paid to the employee. The maximum amount an employee may receive as a result of the tax deferral is $248 for a bi-weekly payroll, or 6.2% of qualifying wages.

The amount deferred must be withheld from employees’ paychecks “ratably” from January 1, 2021 to April 31, 2021, and employers must timely submit the amounts with their payroll taxes. Deferred payroll taxes will be deemed late and subject to penalties and interest as of May 1, 2021. Employers may be wondering what happens if an employee who participated in the tax deferral is no longer employed in 2021. The guidance allows employers to make arrangements to collect the deferred payments, for example, through a repayment agreement. Keep in mind that not all states permit employers to deduct owed amounts from final wages.

Employers should note that the Executive Order only permits delaying the deadline to withhold and submit the employee’s portion of social security payroll taxes. Deferred amounts are not forgiven. Also, employers may choose not to offer the deferral, and collect and timely pay social security taxes as they normally would.

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