On 8th August, the President signed four executive actions, with a Presidential Memorandum to defer the employee’s part of Social Security Taxes for people. Such an act gave more relief due to the COVID-19 pandemic.
The act can only defer taxes, meaning they need future payments for it to work. However, the act leads the U.S. Treasury Secretary to explore avenues, like legislation, to remove the duty to pay payroll tax deferment, according to the memorandum.
What Do We Mean By The Employee Payroll Tax Deferral Program?
The Presidential Memorandum on 8Th August allowed bosses to suspend the 6.2% withholding of Social Security tax as payroll tax deferment from the paycheck of workers earning less than $4,000 per bi-weekly period, from 1st September through 31st December 2020.
It surges workers’ take-home money by the tax amount. For example, a worker with $2,000 earnings is subject to the Social Security tax and gets $124 more. Know that the IRS doesn’t forgive payroll tax deferment credits and only postpones tax deferment that should be repaid. Under the guidance of the IRS, the employers should withhold postponed taxes over the first four 2021 months, meaning that the workers with a better take-home payment get little paychecks in those months as withholdings for the Social Security tax get doubled until you take the whole amount back.
You can consider more take-home payroll tax deferment payments from September through December 2020 as a short-term loan you need to repay over the first four months.
Does The Government Forgive Unpaid Social Security Taxes?
The Presidential Memorandum directs the Treasury Secretary to know ways to eliminate the obligation for workers to repay deferred taxes. Until firms get further guidance, you can assume that the law applies; meaning that higher take-home pay from payroll tax deferment Social Security taxes would mean small paychecks in the starting four months of 2021.
Does It Apply To Everyone?
Unlike a tax credit, the deferral is for all self-employed people and firms, whether they’re affected by COVID-19. The deferral doesn’t need any special employer selection. Use two rules to know and get full access to the provision and avoid late tax deposits:
As a staff hiring expert, you should pay employment taxes even when you assign an agent to file those. Deposit around 50% of payroll tax deferment taxes by 31st December 2021, and the left out by 31st December 2022, or you’ll have to face penalties.
Latest Issued Guidance On Employee Social Security Tax Deferral
The Internal Revenue Service (IRS) and the U.S. Treasury Department issued the Notice 2020-65, applying the recent Presidential Memorandum that lets employers payroll tax deferment option (i.e., postpone) withholding and Social Security Tax payment for the paid wages on 1st September 2020 through 31st December 2020.
The employers consider whether they should get an employee’s social security taxes under payroll tax deferment or not. They must know the below key takeaways from the Notice:
Employers need to withhold the deferred taxes for a staff member from the wages in equal amounts per pay period from 1st January 2021 to 31st December 2021 (previously 30th April 2021). The withholding is in addition to normal Social Security tax because 2021 paid wages in the same period can cause some concerns and questions.
If staff is not employed with the employer for the full four-month period, the employer is obligated to pay deferred IRS taxes. Penalties, interest, and tax additions accrue on 1st January 2022 or 1st May 2021. If an employee isn’t employed through December 2021, the employer should arrange to collect payroll tax deferment amounts from employees.
When you obtain the employee elections to defer, consider acknowledgment that the deferred amounts are withheld from the wages starting in Jan 2021, and the firm can use other arrangements when necessary to collect the deferred tax, like from firms that separate the firm before the full payroll tax deferment amount is withheld.
On 8th August 2020, the Presidential Memorandum was issued to defer the employee portion of the Old-Age Survivors and Disability Insurance (OASDI) tax duties for certain people.
On 28th August 2020, the IRS issued the notice 2020-65 offering extra details to implement the Executive Order. The Notice offers orders on the deferral (delayed collection) of the portion of employees (6.2%) of the QASDI tax. Medicare payroll taxes and the employer portion of the Social Security payroll tax deferment won’t be included in the Presidential Memorandum.
What Is Social Security Tax?
Another name for social security tax is the QASDI tax. It is the money that the payroll provider deducts from your biweekly pay (known as the share of the employee). The amount is added to the additional QASDI amount that your employing agency pays for you (known as the share of employers) to the Federal Government to fund the Social Security program. These payroll tax deferment amounts are identified on the biweekly Earnings and Leave (E&L) statements on the Employee Personal Page (EPP).
Repaying Deferred Taxes
Employers make payroll tax deferment through the Electronic Federal Tax Payment System or debit or credit card money order with a check. These payments must be different from other tax payments to ensure they apply to the payroll deferred tax balance. The IRS systems don’t recognize the payment with other tax payments or are sent like a deposit.
EFTPS will soon have a new option of selecting the payroll tax deferment payment. The employer selects the deferral payment and then changes the date to the applicable tax payment period.
When the firm doesn’t work for the organization, the employer ensures the repayment of the whole deferred amount. The employer should collect the employee’s part through their ways of recovery.
The Form 941 of the Quarterly Federal Tax Return was for the second, third, and fourth 2020 quarters to reflect the employer’s deferral or the employer’s Social Security tax share.
If you’re self-employed, you can file the valued taxes using Form 1040-ES. 2020 estimated payroll tax deferment payments due on 15th April 2020 and 15th June 2020 were postpone to 15th July 2020 to coincide with the new income tax deadline. If you want to defer 6.2% of the Social Security taxes based on the estimated income from 27th March 2020 through 31st December 2020, you can deduct the same amount from the due taxes and adjust quarterly payments.
Employer Payroll Tax Deferral vs. Employee Retention Credit
Generally, few limits are there to defer payment of the firm’s part of the Social Security taxes than on getting refundable credit on such taxes. The below table shows the main differences between these provisions.
|Payroll Tax Deferral||Payroll Tax Credit|
|Employees||All||100 or more full-time, not working > 100 full-time, whether working or not|
|Employers||All||Full or part closing by law with low gross receipts|
|Timeline||27th March 2020 to 31st December 2021||13th March 2020, to 31st Dec. 2021|
|Affected taxes||Employer SS taxes part||Employer’s part of eligible SS taxes|
|Due to taxes||50% Dec. 31st, 2021;
50% Dec. 31, 2022
|None + prospective refund|
|FFCRA impact||None||No credit for FFCRA credits|
|PPP loan impact||None||No credit for the loan|
What Do We Conclude?
From an economic point of view, the current value of four months’ employee payroll tax deferment is likely to be less than $200 per staff member. Firms should have uncertainties related to dealing with the withholding of employees from January through April 2021. And the additional compliance cost with a limited economic benefit for the employees. However, the calculus can change when the IRS offers guidance about tax forgiveness.
As we study the effects of COVID-19, lawyers at Business Tax Benefits imply a teamwork approach to counsel clients and strategy developments for different business and legal issues that might arise in various sectors. With the Business Tax Benefits ERC Tax Calculator and the best consultants, you can find out the IRS’s approx. Payroll tax deferment and the consultants help you get a fair estimate for the same.