Facebooktwitterpinterestlinkedinmail

On August 8, President Trump issued a Presidential Memorandum to defer the payment of the employee share of social security tax from September 1 through December 31, 2021. But what, exactly, does this Payroll Tax Deferral mean, and should employers take advantage of it?

10 Things You Need to Know About the 2020 Payroll Tax Deferral

This payroll tax deferral was enacted by President Trump to provide relief to some employees through the end of the year. However, some points of the action are confusing or off-putting to employers and employees alike. Here’s what you need to know:

1. Employees Must Make Less than $4,000 Bi-Weekly to Qualify

The cutoff for qualifying for the payroll tax deferral is $4,000 bi-weekly, or equivalent amounts for other payroll schedules. There is no “phase out” for amounts leading up to $4,000 bi-weekly, so individuals making $3,999 every two weeks would qualify while individuals making $4,000 every two weeks would not.

2. It is the Employer’s Decision Whether to Offer the Deferral

Employers are not required to defer payroll tax for their employees during the deferral period. They can make the decision on a company-wide basis, and even on an employee-by-employee basis. However, keep in mind that only employees making less than $4,000 bi-weekly are eligible.

3. Commissions and Bonuses Apply

If you receive commissions or bonuses that inflate a paycheck to over $4,000 during the deferral pay period, you would not be eligible to receive the payroll deferral for that paycheck.

4. It’s Not All or Nothing

The payroll tax deferral is not based on an average bi-weekly income; it is based on the actual payroll being paid out to the individual every two weeks. While an employee may qualify one pay period for making less than $4k, they may not qualify the next pay period if they make more than $4k. It also means you don’t “opt in” for the entire period; you can start late or end early. This is one reason some employers are put off by the deferral since it can be difficult to track, especially with companies who have a large number of employees.

5. It is Employee-Side Social Security Tax that is Being Deferred

The tax being deferred is the employee-side Social Security tax, which is 6.2% of an individual’s income. Therefore, this is a benefit to the employee and not necessarily a fiduciary benefit to employers.

6. This is Only a Delay

The payroll tax deferral, at this time, is not a forgiveness; it is only a delay. These payroll taxes will be required to be paid back beginning January 2021. For most employers, this will mean withholding increased payroll taxes from January 1 through April 30. For employees whose annual wage remains the same between now and April 30, this will mean they have 2X as much Social Security tax withheld during this period (6.2% normal Social Security tax withholding plus a portion of deferred Social Security tax withholdings from 2020).

7. This Could Increase Net Pay for Some Employees

The reason this is being offered as a relief for employees is because it means that employees making less than $4,000 bi-weekly will likely see an increase in net pay. Social security tax is 6.2% of your wages, which means that this deferral could increase your net pay in that amount through December.

8. Paychecks Will Decrease for These Employees in January

Since the deferral is, at this time, a deferral, not a forgiveness, the amount withheld will have to be paid back beginning January 2021. The employer will have to recover the total deferred amount from the employee, which will generally mean that from January 1-April 30, 2021, paychecks will decrease 6.2% in addition to the regular payroll tax rate to cover these additional costs.

9. At This Time, Forgiveness is Not Guaranteed

The goal of this deferral is to have the payroll tax forgiven before the repayment period begins in January 2021. However, at this time, the issue is divided. Before signing the deferral tax memorandum, President Trump spent months pushing for a coronavirus relief legislation that would include a payroll tax holiday, but the proposition met resistance on both sides. Now, the president hopes to be able to turn the deferral into a payroll tax cut, but it would require congressional action. At this time, Democrats and Republicans have yet to reach an agreement on another coronavirus relief package.

10. Many Employers are Opting Out Due to Administrative Efforts

Changing payroll systems is always tricky. This is even more the case when the change only applies to some employees, only applies for a short period of time, and when the change will require a second update in the beginning of 2021 to recover the deferred amounts. Because of these administrative challenges, many employers are opting out of the deferral. For those employers who use payroll companies, many of these companies did not have these changes made and available at the beginning of the deferral period, so some employers who did opt in were not able to defer during the first payroll of the deferral period.

11. There is No Guidance in Place for Employers Who Lose Employees

Your employer will generally offer repayment of these withheld taxes in even amounts from January 1 through April 30, 2021, but if an employee changes jobs, the employer would still be liable for the payroll tax deferred. There are not yet any guidelines for how employers would recover the deferred payroll tax from employees who left prior to or during the payback period, but it is assumed that the employer would be able to withhold the entire deferred amount in a single paycheck. For some employees, this would mean their final paycheck would be significantly reduced.

Should I Take Advantage of the Payroll Tax Deferral?

Some businesses question whether they want to participate in the payroll tax deferral. This is because it increases administrative work for the next 8 months (4 months of deferrals and 4 months of paybacks). It also means that employees will receive less in take-home pay beginning January 1, 2021. Some companies are banking on the hope that Congress will pass legislation to forgive the deferred taxes, but at this time, there is no guarantee.

About the Author

Jill Tavey Outsourced CFO Preferred CFO

Jill Tavey is an experienced outsourced CFO with over a decade of high-level financial expertise and experience. Her ability to negotiate, make and maintain key relationships, and shape strategic direction has helped propel multiple companies through significant growth.

Jill Tavey, CFO

You may also be interested in…

What is a 5 Year Forecast, and Who Needs One?

What is a 5 Year Forecast, and Who Needs One?

If your company is preparing to raise capital or if you are currently writing a business plan, you may be getting ready to build your 5-year financial forecast. It can be intimidating to plan this far into the future—as well as knowing what kind of projections to...

7 Common Cash Flow Issues and How to Solve Them

7 Common Cash Flow Issues and How to Solve Them

7 Common Cash Flow Issues & How to Fix Them Cash flow-related issues are one of the most problematic for organizations. A study by Jessica Hagen of U.S. Bank showed that 82% of businesses that failed had some sort of cash flow issue. However, many cash flow issues...

5 Common Pitfalls When Financing Inventory

5 Common Pitfalls When Financing Inventory

On September 25, 2019, Troy Skabelund presented a webinar for Navigator Business Solutions to discuss 5 common pitfalls many businesses make when financing inventory. These issues, he explains, are often blind spots to businesses that hold inventory. In this webinar,...

What is a Virtual CFO?

What is a Virtual CFO?

What is a Virtual CFO? A virtual CFO is an off-site, part-time CFO providing high-level financial strategy services. A virtual CFO will help with financial forecasting, systems optimization & reporting, maximizing profits and shareholder growth, preparing for...

Spending Money to Save Money in Business

Spending Money to Save Money in Business

When to Spend Money to Make Money (and When to Not) When it comes to business, most of us live by the axiom that cash is king. We’re stringent with our overhead, careful with our purchases, and strategic with our hires. We also know that there are times you need to...

When Should You Hire a Part-Time Bookkeeper?

When Should You Hire a Part-Time Bookkeeper?

When a company first starts out, the owner is often a Jack-of-All Trades, doing everything from interfacing with clients, developing product, and keeping the books. Although dipping into different disciplines can be exciting, there does come a time when delegation is...

How Much Does a Fractional CFO Cost?

How Much Does a Fractional CFO Cost?

On average, fractional CFO costs $3,000/month to $10,000/month. The most common agreements are between $5,000-$7,000/month for most small- to mid-sized companies. The cost of a fractional CFO depends on the scope of work provided, the size and complexity of the...

What is Cash Flow and Why Is It So Important?

What is Cash Flow and Why Is It So Important?

What is Cash Flow and Why Is It So Important? Many financiers and business owners will agree that there is one four-letter word that is more important to a company than any other. C-A-S-H. Cash within a business is much like the waves of the ocean. It is constantly...

Facebooktwitterpinterestlinkedinmail