Payroll tax deferral: What employers need to know

In early August, President Trump signed an executive order to defer employee contributions to payroll taxes from September 1 through the end of 2020. Few details were initially available on how the payroll tax deferral would work and if taxes would be forgiven. On Friday, the IRS issued guidance that provided details on who’s eligible and when the taxes would be due. 

The move was to provide employees with more cash in the short-term, though the tax may still be due after the end of the year. 

Who’s eligible for payroll tax deferral? 

The deferral is only allowed for employees who make less than $4,000 pre-tax during a biweekly period, which equates to $104,000 per year. 

When are deferred payroll taxes due?

The tax liability may not be forgiven, and the tax amount would then be due by April 30, 2021. Interest, penalties and additions to tax will begin to accrue on unpaid taxes starting May 1, 2021.

How does payroll tax deferral work for employers? 

Employers are held accountable for withholding payroll taxes from their employees’ paychecks, and it’s up to employers to opt in or out of this program. If employers do opt in, they’ll need to be able to calculate the new payment amounts for all of their eligible employees and make changes to their payroll to reflect these new amounts for the next four months. Employers will need to start collecting the deferred taxes in each pay period beginning in January through the end of April of 2021 by withholding enough to cover the deferred tax along with the amounts due for 2021.

What’s the risk for employees?

Employees will need to budget accordingly. While they’ll see larger paychecks for the rest of the year, their paychecks during the first few months of 2021 will be lower than usual to account for the deferred tax amount. For example, someone making $75,000 per year would receive an extra $178.85 per biweekly pay period and owe $1,609.62 in taxes in 2021, according to the Chamber of Commerce. 

What should you expect from your payroll provider?

There are some unknowns about the program and some tax experts have pointed out potential risk for employers, for example if an employee with deferred amounts outstanding leaves the company before April 30, 2021. If you wish to opt your business into the program, look out for future clarifying guidance from the IRS. You should also contact your payroll provider to find out if they’ve accounted for this program by adding functionality that helps you identify eligible employees, easily update their payment info and keep track of the deferred tax amounts. 

At Everee, we’re monitoring this program and all developments and communications coming from the IRS. Our customers are able to opt in, and we’ve updated our platform so it will perform the necessary calculations and provide reporting for the deferred amounts for you and your employees. Contact us anytime at info@everee.com with questions or to enable this program for your company.

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