On August 8, 2020, the President of the United States issued a Presidential Memorandum allowing employers to defer withholding and payment of the employee’s portion of the Social Security tax if the employee’s wages are below a certain amount. Medicare taxes are not covered, only FICA taxes (i.e., the 6.2% portion of the federal payroll tax on employees). The deferral also applies to the employee portion of the Railroad Retirement Act Tier 1 tax. Let’s take a look at what this means:
Applicable Wages
Applicable wages refer to wages paid to employees during the period September 1, 2020 through December 31, 2020 and only applies to payments of taxable wages to an employee that are less than $4,000 during a bi-weekly pay period (approximately $104,000 per year) or the equivalent threshold amount with respect to other pay periods.
An employee earning $50,000 a year will owe approximately $1,073 in deferred taxes next year while one making $104,000 will owe $2,232.
No deferral is available for any payment to an employee of taxable wages of $4,000 or above for a bi-weekly pay period.
The determination of applicable wages is made on a pay period-by-pay period basis. For example, if the amount of wages or compensation payable to an employee for a pay period is less than the corresponding pay period threshold amount, then that amount is considered applicable wages for the pay period, and the relief applies, irrespective of the amount of wages or compensation paid to the employee for other pay periods.
Payment of Deferred Applicable Taxes
The IRS has issued a draft of a revised Form 941, Employer’s Quarterly Federal Tax Return to reflect the payroll tax deferrals. However, if the employer does not defer FICA (i.e., the taxes are withheld as they normally are), payment of the applicable taxes happens as it normally does. Furthermore, unless Congress authorizes forgiveness for these tax liabilities, employers deferring payroll tax obligations must withhold and pay the total applicable taxes between January 1, 2021 and April 30, 2021. If they do not do so, interest, penalties, and additions to tax begin to accrue on May 1, 2021.
At present and if necessary, employers may make arrangements to otherwise collect the total applicable taxes from the employee. This means that employees could, in effect, have double the deduction taken from their paychecks next year to pay back the deferred portion of tax.
Additional information regarding payroll tax deferral is likely forthcoming, but if you have any questions about payroll tax deferment right now, please don’t hesitate to call.