Social Security Tax Deferral(?)

On August 8, President Trump issued an executive order calling for a payroll tax deferral from September 1 through December 31, 2020. The IRS issued guidance (Notice 2020-65) on August 28th and the tax holiday took effect September 1st. Unfortunately, the IRS Notice was rather brief and many questions remain but here's what we know.

Employer participation is voluntary as the guidance does not include penalties for noncompliance. In effect, an employer may deny the deferral.

The deferral applies only to the 6.2% Social Security tax and not the 1.45% Medicare tax. Employers must continue to pay in their matching 6.2%.

Only employees that earn less than $4,000 pre-tax on a bi-weekly basis are eligible for deferral.

It's important to keep in mind that this is only a deferral and not forgiveness. Employers would need to start collecting the deferred amounts beginning in January 2021. Any funds not repaid will be the responsibility of the employer and may be subject to penalties. This is, of course, unless Congress were to pass legislation waiving the taxes. Waiving the taxes could result in shortfalls in the Social Security and Medicare trust funds which would need to be made up in some way.

I'm struggling to see a major benefit of all of this for the two main reasons above:

It's not forgiveness as it stands right now. Therefore, employees will be paying this money back next year so at best it's a short-term interest free loan.

Employers may ultimately be on the hook for the unpaid amounts. Employee turnover can be a real challenge between now and the end of the year. Aside from the potential financial burden, there's also the challenge of implementing this program.

Kelly Philips Erb, a tax attorney and Forbes contributor puts it this way:

Ouch!

What to do? If you believe that a compromise can be had and you want to offer the deferral option to eligible employees, you'll need to work with your payroll provider to understand their process for deferral. Unfortunately, some are not modifying their systems and the deferral won't be possible. Others are still digesting the information to make a decision. In any case, think long and hard before offering this option to employees.

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