Small Business Update: Payroll Tax Deferral
On August 8, 2020, the President issued a Memorandum allowing employers to defer withholding and payment of an employee's portion of the Social Security tax (i.e., the 6.2% FICA portion of the federal payroll tax on employees). Medicare taxes, however, are not covered. The payroll tax deferral is effective starting September 1, 2020, and also applies to the employee portion of the Railroad Retirement Act Tier 1 tax. While employers are allowed to defer the withholding and payment of the payroll taxes on employees' applicable wages, they are not required to do so.
Let's take a look at how this affects employers and employees:
Applicable wages refer to wages paid to employees during the period September 1, 2020 through December 31, 2020. The payroll tax deferral only applies to an employee's taxable wages that are less than $4,000 during a bi-weekly pay period (approximately $104,000 per year) or the equivalent threshold amount with respect to other pay periods.
An employee earning $50,000 a year will owe approximately $1,073 in deferred taxes next year while one making $104,000 will owe $2,232.
No deferral is available for any payment to an employee of taxable wages of $4,000 or above for a bi-weekly pay period.
The determination of applicable wages is made on a pay period-by-pay period basis. For example, if the amount of wages or compensation payable to an employee for the pay period is less than the corresponding pay period threshold amount, then that amount is considered applicable wages for the pay period, and the relief applies - irrespective of the amount of wages or compensation paid to the employee for other pay periods.
Payment of Deferred Applicable Taxes
The IRS has issued a draft of a revised Form 941, Employer's Quarterly Federal Tax Return that adds a line to reflect any payroll tax deferrals. If an employer chooses not to defer the FICA portion of an employee's wages (i.e., the taxes are withheld as they normally are), payment of any applicable payroll taxes is required as it normally is.
Unless Congress authorizes forgiveness for these tax liabilities, employers deferring payroll tax obligations must withhold and pay the total applicable taxes between January 1, 2021 and April 30, 2021. Interest, penalties, and additions to tax do not begin to accrue until May 1, 2021. This means that employees could, in effect, have double the deduction taken from their paychecks next year to pay back the deferred portion of tax.