Social Security Tax Deferral Q&A

I've had several Clients contact me about this, and after taking them through the pros and cons of implementing this tax deferral, I thought there may be others out there who would appreciate having this helpful information.

At first glance, Employees may be quick to jump on the chance of receiving a higher paycheck by not having their portion of Social Security Tax withheld. This would be an extra bump of 6.2% of their gross wages. However, it is important to note that these funds will still need to be paid at a later date. The tax has not gone away. It's merely being deferred in an effort to give employees more cash during the pandemic. Down the road, employees may find themselves in a cash crunch with a significantly smaller paycheck when it's finally time to pay those taxes. Think of it as a temporary loan, given to employees a little bit every pay cycle, that they then have to repay in a few short months. If employees are cash-strapped now, how would they pay back this tax later? The end of the year is often a difficult time cash-wise for many people due to the holidays. This could just compound the issue.

To qualify, employees gross wages must be less than $4,000.00 biweekly. The tax deferment period covers wages paid between September 1, 2020 to December 31, 2020. Also, it is up to the Employer whether or not this tax deferment will be implemented.


Employers are wondering:

1. Is this tax deferral Mandatory?
No. Many businesses are choosing not to do this due to the extra Administrative costs and Payroll-tracking headaches. Many also worry about whether or not their employees will be able to pay this back once the deferral period is over.

2. Should I implement this tax deferral?
Maybe - it depends on the situation. If the business has the ability to spend extra time and money tracking these tax deferrals, is not worried about employees leaving before payback time, and has the cash ready for payment time, then it may make sense for them to do this. If the business is experiencing a cash crunch, or the payroll system has not been updated to provide this capability, or there is uncertainty about employee retention (and possibly getting stuck with the tax bill) then it may not make sense to implement the tax deferral.

3. If I implement the tax deferral for my employees, when do I have to pay the taxes to the IRS?
By April 30, 2021. After that, penalties and interest will begin accruing.

4. What safeguards can I put in place in the event employees quit before paying back the deferred tax?
Employers can withhold the amount due from the final paycheck. Employees can also repay the amount owed to the company before they quit. Ultimately though, the Employer is responsible for paying these taxes to the IRS when they are due.

As always, everyone's situation is a little different. Please consult with your Accountant and/or Payroll Provider before making any changes.

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