On August 8th President Trump signed a presidential memorandum deferring the employee share of Social Security taxes due on wages paid between September 1st and December 31st. The intent of this memorandum was to provide employees with a temporary increase in cashflow in response to the COVID-19 pandemic. However, since this memorandum only defers the taxes and does not forgive them, they will need to be repaid at some point. Since the memorandum was signed we have been waiting for the Treasury to issue guidance on how this deferral will be implemented so that we could inform our clients on what they can expect.
When the Treasury finally released their guidance this past Friday they left many questions unanswered. Per the Treasury guidance employers who do not withhold the employee’s Social Security taxes during the deferral period will need to pay the deferred taxes between January 1st and April 30th or be subject to penalties and interest. The guidance states that it will be the responsibility of the employer, not the employee, to pay the deferred taxes at the end of the deferral period. However, the guidance also states that employers may then make arrangements to collect the applicable taxes from the employees.
What this means is that if your employer does not withhold Social Security taxes from your paycheck during the deferral period then you will see a small increase in your net paycheck until the end of the year. But in January you will either see one lump sum deducted from your paycheck or see your paychecks decrease for the first few months of the year as your employer collects back the Social Security taxes that are due.
One question that the guidance did not answer was who decides whether to participate in the deferral, the employer or the employee? Some employees may welcome a short-term increase in their net paycheck while others will not want to deal with the hassle of repaying those taxes in a few months. It remains to be seen if employees will be able to choose if they want their taxes deferred or if they will have to go along with what their employer decides.
Our Recommendation to Employees
As we have already said, this is NOT forgiveness of your Social Security tax obligation, it is only a deferral until January. To avoid an unwelcome tax bill in January it is our recommendation that you reach out to your employer and let them know that you do NOT want to participate in the payroll tax deferral. Your paycheck will remain unchanged through the rest of the year and you will not be faced with a large tax bill in January. If you employer chooses to implement the deferral across the board and does not allow you to opt out then we would recommend setting aside the additional money in each paycheck to pay back the deferred taxes when they become due next year.
Our Recommendation to Employers
We are now one day from the start of the social security deferral period and there are still many questions that the Treasury has not answered regarding how employers will report taxes that have been deferred and if employers will be responsible for taxes when they are unable to get them from employees in January. Due to all of this uncertainty our recommendation is that employers do not participiate in the deferral for the time being and continue to withhold taxes as normal.
SOCIAL SECURITY TAX DEFERRAL
Failing to order your affairs to minimize your tax burden could cost you significant money - so don't wait to take action. If you have additional questions or need some planning help, please reach out to us.