As you’re no doubt aware, in early August President Trump signed a memorandum allowing employees to defer their share of Social Security taxes between September 1 and December 31, 2020. This was intended as a measure to provide individuals with extra income during this time, but merely delays the payment of these taxes and doesn’t forgive them.
And now we have a little more information . . .
Last week, the IRS issued some guidance that still leaves some questions about the administration of this deferral. Here are the high points:
- Any employee whose pretax wages are less than $4,000 in a two-week period is eligible to elect to defer the payment of their Social Security payroll taxes, equal to 6.2% of their wages for that pay period.
- Such deferral can be deferred without any penalties or interest as long as it is paid back by April 30, 2021.
- If an employee leaves the company before paying back deferred taxes, the employer is responsible to pay it back (or maybe withhold from the employee’s final check?).
- It appears that each employer can decide whether or not to offer this deferral option to their employees.
So is this a good idea?
It seems to have more disadvantages than advantages. It does provide a little extra income to employees in the short term, but it’s treated like a loan with payments due beginning in January 2021.
For example . . .
An employee earning $1,500 in a bi-weekly pay period can take home an additional $93 (6.2% of $1,500, ignoring pretax benefits such as those paid through a cafeteria plan). If the employee defers that amount each pay period between September 1 and December 31, he/she will have accrued a total of $810 due to be paid back over the first four months of 2021. In addition to paying back that $810 in early 2021, the employee will also have normal payroll tax withholding, resulting in a double deduction.
If you have further questions, please contact your Kindred professional. We’ll continue to keep you informed!