IRS: Payroll Tax Break Comes at a Cost

While employers may elect to stop withholding some payroll taxes from Sept. 1 through Dec. 31, 2020, the IRS says those taxes must eventually be paid.

An Aug. 8 Trump administration executive order allows employers to defer payroll tax obligations to mitigate the impact of the coronavirus pandemic.

It applies to the combined 12.4% Social Security tax that employers and employees pay. Employers can elect to stop withholding certain employees’ 6.2% share of the tax while continuing to pay their 6.2% share.

The employee’s share then comes due May 1, 2021.

Employers may apply the deferral to workers who earn less than $4,000 in pre-tax, biweekly pay, or less than $104,000 annually.

Which employees can receive the break is determined each pay period, so an employee who earned over the threshold in one pay period may be eligible for a deferral in the next pay period if pre-tax earnings fall below $4,000.

IRS Guidance

According to the IRS guidance, the employer may resume withholding the employee’s share of the payroll tax between Jan. 1 and April 30, 2021.

But it has to be enough to cover the amount deferred from Sept. 1 through Dec. 31, 2020.

If the deferred tax is not paid back in time, interest, penalties, and additions to the tax will accrue.

So that means a worker who received the 6.2% deferral will essentially have double the payroll tax—12.4%—deducted from Jan. 1 through April 30, 2021.

If the deferred tax is not paid back in time, “interest, penalties, and additions to the tax will begin to accrue” after May 1, 2021, the IRS said.

It also said that “if necessary” the employer “may make arrangements to otherwise collect the total applicable taxes from the employee” but did not suggest how an employer could do that.

Deferral Discretionary

“These tax deferral provisions are discretionary and implemented by the employer as part of processing payroll,” CBIA HR Counsel Mark Soycher said.

“Employers who opt not to implement this tax deferral may upset workers looking for a 6.2% bump in pay,” he said.

“But those employees would have no recourse to force their employer to participate.”

Employers who opt not to implement this tax deferral may upset workers looking for a 6.2% bump in pay.

On the other hand, Soycher said, workers who don’t want their payroll taxes deferred have no recourse if the employer chooses to leave the deferred money in their paycheck.

“However, the cautious worker could set aside the extra money to cover the 12.4% pay cut they will see from Jan. 1 through April 30 when their employer resumes payroll tax deductions, including an additional 6.2% to cover the previously deferred taxes,” Soycher said.

Tax Forgiveness

The president has floated the idea of forgiving the tax but that would take Congressional action.

Soycher suggests not to expect Congress to change the tax deferral to a tax forgiveness, given the political climate and concerns over Social Security funding.

The IRS guidance, issued Aug. 28, makes it clear that employees who defer the tax will still have to pay it.

The Trump administration is giving employers the option to pause collecting payroll taxes — though employees may have to pay the money back next year.

Trump says he plans to forgive the taxes if he's reelected. But in reality, only Congress can do that.https://t.co/tuMKi3ro0u

— NPR (@NPR) September 1, 2020

That could leave employees facing a large tax bill, the U.S. Chamber of Commerce and other business organizations noted in an Aug. 18 letter to Senate Majority Leader Mitch McConnell, House Speaker Nancy Pelosi, and Treasury Secretary Steven Mnuchin.

“The executive order creates a substantial tax liability for employees at the end of the deferral period,” the letter said.

“Without Congressional action to forgive this liability, it threatens to impose serious hardships on employees who will face a large tax bill as a result of deferral.”

Employer Liability

Soycher notes that while the deferred taxes come from employees’ paychecks—essentially an employee tax liability—employers are legally obligated to withhold from employees’ paychecks and remit those funds to the IRS.

If an employer didn’t withhold enough—or didn’t withhold at all—the employer is still obligated to pay the 6.2% tax to the IRS.

Failure to pay will likely result in the IRS seeking payment from the employer rather than the employee, Soycher said.

Failure to pay will likely result in the IRS seeking payment from the employer rather than the employee.

This raises another concern for employers.

If an employee separates from employment around Dec. 31, 2020, or at any time next year before an employer was able to deduct a sufficient amount from payrolls, the employer would liable for the total amount of deferred taxes.

In addition, Soycher said companies using a payroll service should consider contacting the service for guidance on the tax deferral.

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For more information, contact CBIA’s Mark Soycher (860.244.1900) | @HRHotline