A few weeks ago, President Trump signed four executive orders to act as a bridge until more permanent measures for coronavirus aide are passed by Congress. The least understood of these gave employers the option to defer the employee-only portion of 6.2% for Social Security tax for employees that typically earn less than $104,000. This deferral is allowed from September 1st through December 31st of this year. It is important to note that employees do not get to make this decision and this decision is at the employer’s sole discretion.
Based on current IRS guidance this is simply a deferral of taxes owed, so additional withholding on compensation from January 1 through April 30th, 2021 would have to increase to recover the deferred taxes. If the employer does not collect the deferred taxes from an employee (i.e. terminated employee), the employer is still responsible for payment on the deferred taxes by May 1, 2021. For eligible employees, employees would have no Social Security tax withheld now until the end of the year but would have double the normal withholding for the first four months of 2021 to recover the delayed taxes. If the taxes were not withheld from an employee’s paycheck then the employer would be responsible to pay the shortfall for the remaining deferred taxes.
In our view implementing this deferred tax option for eligible employees does not seem to make sense. It may create a cash flow burden next year for employees and potentially an unfunded liability for employers. There has been some speculation that Congress may forgive these deferred liabilities, but given the current political uncertainty, we do not feel secure recommending this based on conjecture. If you have any questions or concerns, please do not hesitate to contact us.