Background
On August 8, 2020, President Trump signed an Executive Order which would allow employees to defer paying in their share of Social Security taxes starting with payrolls that occurred between September 1, 2020, and December 31, 2020. This Executive Order only applies to employees who make less than $100,000 annually.
For employees who qualify, the deferral applies just to the employee’s portion of Social Security taxes (6.2% x applicable wages) and not the employer’s share of Social Security taxes (6.2% covered by employers). Since this Executive Order is a deferral of an employee’s Social Security taxes and not forgiveness of those taxes (only Congress can grant forgiveness of taxes), employees would have to pay back what was deferred during the period of January 1, 2021 – April 30, 2021.
What You Need to Know
The most important point to understand and to explain to employees who ask about the Executive Order is that this is not a reduction in taxes or a removal of a tax; this is a deferral of tax. Employees would pay less tax from September through December 2020, but they would in turn pay more tax from January – April 2021. At the end of April 2021, the exact same amount of tax will have been paid. Basically, employees would get more money now and less money early next year. While employees may like a larger check during the last four months of 2020, they need to be prepared for a smaller check for the first four months of 2021.
For example, if an employee is paid $1,000 per week in gross wages subject to Social Security tax, the employee pays $62 in Social Security taxes ($1,000 x 6.2%) and the employer pays $62 in Social Security taxes. If the employee elects to defer their share of Social Security taxes for the rest of 2020, the employee will receive $62 more per week in net wages. However, starting in January of 2021, the employee will receive $62 less in net wages per week until the deferred Social Security taxes are repaid.
There are some that suggest the government may eventually tell people they do not have to pay this deferred tax back, but we do not think this will happen. Social Security needs taxes paid into the system, and it is unlikely that Congress will agree to forgive deferred taxes.
Unanswered Questions
Although the ability for employees to defer their portion of Social Security taxes starts September 1, there are still questions that have not been answered. The biggest question is who is responsible for paying the deferred tax back in 2021? Additional guidance released by the IRS seems to clarify that the employee is ultimately responsible for paying the deferred taxes, regardless of continued employment. However, it is the employer’s responsibility to collect the taxes, meaning the enforcement falls to the employer. This would be a challenging situation if the employee is no longer employed at the practice and/or if the employee refuses to pay back the deferral. It would not be fair to employers if the employee received the benefit in 2020, but then the employer had to pay the benefit back in 2021.
Also, the language of this Executive Order indicates that it is the “employer” who can participate in the program or not. As it is written, it seems that if the employer chooses to participate, they may require all employees to defer their share of Social Security taxes.
Our Recommendations
From our perspective, the Executive Order is designed to look like help, but in the end, it unfortunately leads to unnecessary complexity with payroll while causing fluctuations in an employee’s take-home pay and cash flow. We do not recommend participating in the program because it is not in the best interest of the employee in the long run. In addition, participating in the program could create challenges for employers who have to collect extra Social Security taxes from employees in 2021.
If you have employees who want to participate in this program, we recommend that you first make sure they clearly understand exactly how it works. Employees need to know how their paychecks will be negatively impacted in 2021 as they pay back deferred taxes. If some employees still want to participate and some do not, because we do not yet know if you can have some participate and some not participate, we recommend that you do not participate until we get final and clear answers to these questions.