Should small businesses defer payroll taxes?

On August 8, 2020, President Trump signed a Presidential Memorandum that allows employers to defer withholding and payment of the employee portion of workers’ Social Security taxes. The change is intended to give employees more money in their paycheck for the rest of the year. Before you decide whether or not to make this change, here’s what you need to know. 

The deferral covers the rest of 2020

For wages paid between September 1, 2020 and December 31, 2020, employers have the option to defer withholding the employee portion of Social Security taxes. Since employers are not obligated to deposit these taxes until they are withheld, the memorandum effectively defers the depositing of the taxes as well. 

Taxes will be deferred, not eliminated

The taxes that are deferred will have to be paid by April 30, 2021. So those employees who get more money in their paycheck for the last four months of this year will get less in the first four months of next year.  In fact, their checks will be even smaller than they were before the deferral. Social Security taxes will revert to being withheld in January, and the deferred taxes will be due as well, so the tax will effectively be doubled during that time. 

The president has indicated that he will forgive these taxes entirely, but the authority to do that lies with Congress. They would have to agree in order for this to happen.  

Related: 2021 Federal tax deadlines for your small business 

Not all wages will qualify

The deferral applies to payments of taxable wages of less than $4,000 every two weeks, according to the IRS. Each pay period is considered separately, so if your employee makes $3,800 in one two-week period, the taxes on that pay can be deferred. If they make $4,200 in the next two-week period, the taxes on that pay cannot. 

The limit applies to wages paid at other frequencies in an equivalent manner. For example, if you pay your employees weekly, the threshold amount is $2,000. 

A company must defer the taxes for all eligible employees. Employees cannot opt in or out of the deferral. 

Related: 3 Tips to help small business owners calculate payroll taxes

There are still some unknowns

It’s unclear what would happen to an employee who has their withholding deferred this year, but leaves your company before the end of the year. The IRS says employers could arrange to collect the taxes from such employees, but doesn’t say how. 

It’s also unclear how the deferral would affect collective bargaining agreements, so if you employ union workers, use caution. 

So what’s an employer to do? 

First, consult your tax advisor, and consider whether your employees would rather have larger paychecks now, followed by smaller ones, or a consistent amount across the board. Then, communicate your decision and the reasons for it to your employees.

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