Payroll Tax Deferment

Payroll Tax Deferment

Member Insight Article by Nicole Odeh of The Small Business Accounting Solution 

When Congress failed to pass another wave of economic stimulus measures in August, President Donald Trump signed a set of executive orders to try to quell some of the pain caused by the COVID-19 pandemic. One of those orders was a payroll tax deferment for workers making less than $104,000 a year. In a time when so many are looking for any positive steps up, this sounded great. In actuality, however, it is turning out to be less of a boon than hoped.

First, know that this is only a deferral of taxes and not a cancellation of them.  The order makes it acceptable to not collect Social Security and Medicare payroll taxes from September to December 31, but these deferred taxes still need to be paid by April 30, 2021. If an employee had this deferral for the full period, they would then be required to have twice the regular amount withheld over the first four months of next year to repay it.

Second, participation in the deferral is voluntary. An employer is not under any obligation to stop withholding the taxes. Combine this with the complexity of tracking the liability through the deferral period and then repaying it next year, and simply not engaging in the deferral becomes an attractive (and legal) option. It is so attractive that even the House of Representatives, the Senate, and the Supreme Court are not deferring those taxes

Beyond that, the responsibility of repaying these taxes is on the employer. That means that if an employee deferred taxes from September until the end of the year, then quits on January 1, the employer is left with the obligation to pay back all the taxes that were not collected. Knowing this, it is not surprising that many large employers - including Costco, UPS, FedEx, Home Depot, and Wells Fargo - opted not to change paycheck withholdings for their employees.

And of course, just the fact that this is a payroll tax deferral means that it would potentially only help those currently employed – arguably the lucky ones in this time when many are struggling to find work.

Of course, there is still the possibility that Congress could make a payroll tax deferral a payroll tax forgiveness, effectively giving this money straight to workers. Even that, though, is not as simple as it sounds, and we just do not have any further information at the time I am writing this.


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