You may remember that earlier this month, the President signed an executive order directing the Department of Treasury to defer withholding, deposit, and payment of employees’ social security taxes through the end of 2020. At that point, K·Coe advisors recommended to hold tight as clarifications were needed to answer implementation questions and assess long-term effects. Late last week, on August 28, the IRS issued new guidance for employer considerations on whether or not to implement the deferral.
Below, K·Coe advisors have highlighted key considerations, and potential actions, for employers to consider when deciding on payroll tax deferrals.
Any employer who pays wages subject to social security (or RRTA) taxes.
When are Taxes Paid?
The due date for social security taxes on “applicable wages” (see below) paid between September 1 and December 31, 2020 is delayed until the period January 1, 2021 through April 30, 2021.
What must be Repaid?
Taxes only. Interest, penalties, and additions to tax will accrue beginning on May 1, 2021 only if a balance remains unpaid.
What are Considered Applicable Wages?
Social security wages paid to an employee on pay dates between September 1 and December 31, but only if the wages are less than the applicable threshold for the employer’s pay frequency. The threshold is the equivalent of $104,000 per year, or:
The threshold is evaluated for each pay date, so if an employee, who normally makes $3,750 each biweekly pay period, earns $4,500 on their September 15 paycheck, the employee does not have Applicable Wages on September 15, but may have Applicable Wages on September 29.
Additional Considerations for Employers
If an employee quits, the IRS states that the employer may make arrangements with the employee to repay the tax (taking taxes out of the employee’s final paycheck, or requesting repayment of the amount deferred).
Employers may elect not to defer employees’ taxes. The IRS does not require the deferral, and has only delayed the due date of social security taxes.
It is the employer’s choice to defer withholdings (not the employee’s). However, an employer may choose to allow employees to elect to defer or not defer their taxes.
All-or-nothing limitations are instated with strict thresholds (defined above). If the employee’s pay for a pay period exceeds the threshold, the employee does not have any Applicable Wages for that pay period.
Bonuses paid outside of the regular schedule (on a different pay date) would apply a separate threshold.
Next Steps for Employers
1. Decide if you want to defer employees’ social security taxes. You may choose to:
- Defer (make the decision without allowing the employees to choose)
- Don’t defer (make the decision without allowing employees to choose)
- Let employees decide based on individual preference
2. Consider how you’ll handle terminations of employment if you elect to defer (or allow employees to choose). Your options are:
- The employer shoulders the cost (you won’t seek repayment from the employee),
- Have the employee’s last check reduced by the deferral amount,
- Require the employee to write you a check for the deferred amount, or
- Ignore it – either deal with the bill from the IRS if it comes, or let the employee deal with it if the IRS sends a notice to them.
3. Evaluate what the deferrals will be – evaluate which employees are eligible and which are not.
4. Communicate with your employees – preferably in writing.
- If you have ineligible employees, consider communicating with those employees separately to explain why they are not impacted by this policy.
- Define your policy.
- If employment is terminated, how will you handle the deferrals?
- Who should an employee contact with questions?
- If you are allowing employees to defer, here is guidance for how an employee can calculate the (approximate) impact of deferrals:
- Impact on each paycheck: Take your social security withholding on your last regular paycheck. Add that amount to your take‐home pay. This is your new take‐home pay for September through December.
- Total impact: Take your social security withholding on your last regular paycheck. Multiply that amount by the number of pay periods left in 2020. This is the total additional cash you’ll have in your pocket.
- Repayment impact: Take your social security withholding on your last regular paycheck. Subtract that amount from your take‐home pay. This is your new take‐home pay for January through April 30, 2021.
Should you have questions regarding this tax deferral or need implementation guidance, contact a K·Coe tax advisor.