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Employee Payroll Tax Deferral Questions Answered

This article was updated September 2, 2020. The original publication date was August 19, 2020.

President Donald Trump signed several executive orders in early August addressing the negative effects of COVID-19 on the U.S. economy. One order that directly impacts many businesses is the deferment of employee-side payroll tax obligations. Under this order, employers may refrain from withholding the employee’s portion of the Social Security tax. Now that additional guidance has been provided more recently by the IRS and Treasury Department, the following questions and answers will help shed light on who is affected by the deferment and how it would work.  

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What is a payroll tax deferral?

A payroll tax deferment essentially allows for the payment of payroll taxes at a later time. This does not mean that you do not have to pay the taxes, this simply delays when you have to pay them. The U.S. government has enacted key COVID-19 relief laws and regulations, but some are confusing and it can be hard to figure out which ones apply to your situation. Signed into law in March 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act gave businesses the option to defer the employer’s share of payroll taxes. This new executive order now allows businesses to defer collection of the employee’s share of payroll taxes. 

Who is affected by the COVID-19 payroll tax deferral?

The payroll tax deferment affects both employers and employees. The recent IRS Notice 2020-65 indicates that employers now have the option to offer the deferral of the employee’s portion of Social Security taxes to employees that make less than $4,000 bi-weekly during the deferral time period of September 1 through December 31, 2020. Employee eligibility must be evaluated each pay period.

Following the deferral time period, the amount of deferred taxes would then be deducted from the employee’s paychecks from January 1 through April 30, 2021. This deduction is in addition to the payroll tax normally incurred during the January through April time period. Employers must understand that they are responsible for repayment of the deferral to the IRS. If an employee leaves, the employer may recoup the funds through payroll or some other means, but ultimately, it’s the employer’s responsibility to pay back the deferred taxes.  

As an employer, you have the option to offer the tax deferral to qualified employees, but you may want to consult with your business tax specialist or speak with an attorney before deciding how to implement the new policy. There are still questions about how employers should implement the deferment, and a specialist can help you decide what’s best for your business and employees.

If you are self-employed, you also have tax deferment options under the CARES Act, but you may want to check in with a tax professional or speak with an attorney before making decisions about your own withholding. The IRS has an FAQ page dedicated to payroll tax deferments through the CARES Act. 

When does the payroll tax deferral period start?

The executive order and subsequent guidance allow payroll taxes to be deferred for qualifying employees starting September 1, 2020 through December 31, 2020. Any deferred taxes must be withheld from paychecks from January 1 through April 30, 2021. This is in addition to the employee-side payroll tax withholdings that would normally occur during this period.

How do I navigate all the new COVID-19 small business relief options?

It can certainly seem overwhelming trying to keep up with all of the new laws, policies, and regulations being enacted by federal, state, and local governments. These efforts are designed to help small businesses in particular, but how do you take advantage of these opportunities when the rules are complicated and hard to follow?

In the Coronavirus Legal Center, you’ll find timely legal information and assistance for individuals, families, and businesses impacted by the pandemic. As an employer, you will find COVID-specific documents that you can use to navigate employee furloughs, commercial leases, contract renegotiations, and more. You will also get help figuring out whether or not your business is eligible for COVID-19 government relief. For more specific assistance, you can ask one of our volunteer attorneys a question. 

As the IRS and Treasury Department continue to roll out additional information clarifying the new tax deferral policy, watch for announcements from both agencies as we navigate these uncharted waters together. 

This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.

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