Does it Make sense for Employees to Defer Payroll Tax ?
Last Friday, the IRS issued limited guidance on how to implement the payroll tax deferral that was signed by President Trump on August 8. Notice 2020-65 (attached) allows employers to defer withholding on affected employees for payroll paid from September 1, 2020 to December 31, 2020. The deferral applies only to employees whose biweekly (pre-tax) wages are less than $4,000. The deferred taxes would then be later withheld and paid during the first four months of 2021.
Please note that this represents a deferral of employee FICA taxes, not a tax cut. And there is no deferral of the employer’s share of these same taxes. Also, this deferral appears to be elective, not mandatory, although it’s unclear who actually makes the election. Since the deferral applies to the employee’s portion of payroll taxes, it would seem that it’s the employee’s election to make.
This has the potential of getting messy if employees choose to forego withholding during some pay periods and not others. Thus, it seems reasonable for employers to require employees to opt in or out for the entire four month period. Separately, while the deferral will boost after tax cash flow in the short term, the later withholding and payment of the deferred taxes - combined with regular withholding - may create an unwelcome & untimely pay cut in early 2021. For this reason, we’re not a fan of the program.
Your payroll processor may provide you with additional guidance but feel free to contact any one of us with questions.
James J. Houlihan, Jr, CPA, CVA | 08/31/2020