Payroll Tax Deferral Starts Today – Employer Can Elect In or Out

On August 28, 2020, the Department of Treasury and Internal Revenue Service (IRS) issued official guidance for taxpayers on the payroll tax deferral ordered by President Donald Trump on August 8, 2020.

The notice allows employers to defer withholding on compensation from September 1, 2020 to December 31, 2020, and then withhold those deferred amounts between January 1, 2021 and April 30, 2021. This deferral only applies to individuals whose pretax wages or compensation during any biweekly pay period is less than $4,000, which translates to wages below $104,000 annually. For qualifying workers, the deferral only applies to the employee’s portion of Social Security taxes.

This could provide relief to employees who are currently struggling, but could create an issue when those individuals have twice as much withheld from their paycheck in 2021.

In the notice issued by the Department of Treasury, employers are responsible for withholding and paying back any deferred taxes, and states that the employer must recover those taxes from employees or interest, penalties, and additions to tax will become due. The notice says that employers can “make arrangements to otherwise collect the total Applicable Taxes from the employee” but does not provide details on how.

Employers can decide whether they want to opt-in or not. Many companies are expected to opt out to avoid dealing with the difficulty of implementing a payroll tax deferral and burdening employees with large tax bills next year. In addition, some employers may not want to take on the additional risk of paying back deferred taxes.