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September 15, 2020

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Are you eligible for payroll tax deferral in 2020? This has implications for both employers and employees and could cause a rude surprise for you in 2021!

There are generally two separate contributions to the Social Security payroll tax (technically, the Old-Age, Survivors, and Disability Insurance, or OASDI, tax) — a 6.2% employer portion and a 6.2% employee portion.

Already-existing deferral provisions for employers

The Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed into law in March 2020, already allowed eligible employers (and self-employed individuals) to defer the payment of the employer’s 6.2% share of Social Security tax from March 27, 2020, to December 31, 2020.

Any deferral of the employer Social Security payroll tax under the CARES Act must be repaid over a two-year period – half of the deferred tax due by December 31, 2021 and the other half due by December 31, 2022.

Employee portion now eligible for temporary payroll tax deferral

On August 8, 2020, President Trump issued an executive order to allow the deferral of certain payroll taxes during the last four months of 2020, and the IRS recently provided related guidance.

The executive order and IRS guidance expand the payroll tax deferral opportunity – generally allowing employers to defer withholding and payment of the employee’s 6.2% share of the Social Security tax for payroll dates that fall on or between September 1, 2020, and December 31, 2020.

Limitations on temporary deferral

The employee portion of the Social Security tax cannot be deferred for any employee with wages or compensation of $4,000 or more in a biweekly pay period or the equivalent amount with respect to weekly, monthly, or other pay periods (in other words, only salaried workers earning less than $104,000 per year qualify). This dollar threshold applies per pay period, so it’s possible for an employee to qualify for deferral in some pay periods but not in others.

While employers are eligible to defer the employee portion of the Social Security payroll tax, the IRS guidance does not address whether self-employed individuals are also able to do so.

Employers can take advantage of the deferral provisions if they find them beneficial, but can continue to withhold and pay payroll taxes as normal if they wish.

It’s important to note that nothing in the IRS guidance indicates that the temporary payroll tax deferral opportunities are mandatory.

An employer may ask employees whether or not they wish to defer their 6.2% portion of the Social Security payroll tax, but the guidance released does not specifically require it.

When do deferred amounts have to be paid?

If an employer defers the employee portion of the Social Security payroll tax during September, October, November, and December 2020, employees may receive larger paychecks, but this deferred payroll tax must be repaid in 2021 (absent new legislation that specifically forgives deferred amounts).

Specifically, employers will have to withhold extra money from employee paychecks during the first four months of 2021 — January through April — to make up for the four-month deferral. This is in addition to the payroll tax employees must normally pay during 2021.

As a result, employees who benefit from deferral of payroll tax between now and year-end are likely to experience reduced paychecks during the first part of 2021.

An employee in this situation may wish to consider putting any extra funds from a larger paycheck in 2020 into a savings account to compensate for a smaller paycheck in 2021.

Federal workers will receive the temporary payroll tax deferral

While it’s expected that many employers will opt not to defer payroll taxes, the Defense Finance and Accounting Service has announced that the Social Security payroll tax deferral will start automatically in mid-September for military members and civilian employees; they are not eligible to opt out. This affects about 1.3 million federal employees, forcing some workers to take a temporary financial boost that, as of now, they will have to repay next year.

Many questions remain, and additional guidance from the IRS is expected.

Contact your employer (and tax advisor) to determine whether your pay will be affected in 2020 and 2021.

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