What payroll tax deferral means for business owners and employees
Recently, you may have heard news about a payroll tax deferral but aren’t quite sure what that means to you as a business owner or what it might mean for employees. We get it – there’s a lot of information out there, but we’re here to help.
First, let’s clarify two programs that sound similar – payroll tax deferral for employers vs. payroll tax deferral for employees.
- Payroll tax deferral for employers – This provision was part of the March 2020 CARES Act and allowed employers to defer their half of Social Security and Medicare taxes. Find out more about the CARES Act payroll tax postponement.
- Payroll tax deferral for employees – This refers to recent payroll tax guidance that permits the deferral of the employee portion of Social Security taxes. You may have also heard of this deferral using different terms — some have called it a a payroll tax deferral executive order (technically, it was a presidential memorandum) or referred it as the 2020 tax holiday. We’ll discuss that topic in this post.
It’s worth noting that a “tax holiday” typically refers to a reduction or elimination of taxes vs. a deferral of taxes that are intended to be repaid.
While we anticipate additional guidance from the Treasury, we’ll start with the essential questions about what is known — and unknown — about the payroll tax deferral.
Payroll tax deferral guidance
Keep in mind, business owners who want to participate must evaluate multiple factors to make their own decision on what’s best for them and their employees. This article is to provide additional information on the guidance from the Treasury (IRS Notice 2020-65) and is not intended to encourage or discourage employers from participating in this program.
IRS payroll tax deferral – FAQs
The following FAQ list covers payroll tax suspension questions regarding the presidential memorandum issued in August 2020.
Are all employees eligible for payroll tax deferral? How do I know which employees can participate?
No, because there is a wage threshold, not all employees will be able to defer their payroll taxes. Eligibility is determined on a pay period-by-pay period basis – meaning an employee may qualify one pay period but not the next.
An employee is eligible if the amount of wages or compensation paid for any biweekly pay period during the deferral timeframe is less than $4,000. If the employee earns in excess of the $4,000 threshold (even by $1), they are not eligible for the deferral for that pay period.
Review the table below that outlines general eligibility for various pay periods.
|Pay period||Employee wage limit for general eligibility|
|Weekly||Less than $2,000 per pay period|
|Biweekly||Less than $4,000 per pay period|
|Bimonthly||Less than $4,333 per pay period|
|Monthly||Less than $8,666 per pay period|
Are employers required to defer payroll taxes?
The IRS notice doesn’t specifically state that participation is optional; but it appears employers may continue to withhold and remit as usual. If you do wish to participate as soon as your payroll provider is ready, you may continue to withhold and remit your employee’s portion in the meantime.
What is the timeframe for withholding and payment deferral of payroll taxes?
- Deferral period: pay dates during the period beginning September 1, 2020 and ending December 31, 2020
- Repayment period: January 1, 2021 through April 30, 2021
- Interest, penalties, or additions to tax will begin to accrue May 1, 2021
Which payroll taxes are deferred exactly?
The term payroll taxes can refer to a few different things. For this purpose, only the 6.2% employee portion of Social Security tax can be deferred. It doesn’t apply to the employee portion of Medicare tax, federal income tax withholding, or the employer portions of Social Security and Medicare tax.
Individuals paying self-employment tax aren’t eligible to defer the employee-equivalent portion of self-employment tax. However, self-employed taxpayers may be permitted to participate in a similar payroll tax postponement program provided by the CARES Act, which permits them to delay paying one-half of the 12.4% Social Security portion of their self-employment tax.
How will suspended payroll taxes be repaid once the deferral period is over? Who is liable for repayment?
The 6.2% employee portion of Social Security tax will be paid from employee wages and compensation paid from January 1, 2021 to April 30, 2021. Employers will be responsible for withholding and remitting the amounts to be repaid equally over that time period.
With this repayment structure, Social Security tax withholding will be at a higher rate for the first four months of 2021. This is due to the fact that repayment will occur at the same time as regular 2021 Social Security withholding.
The IRS Notice indicates that employers may collect taxes from employees, but the details around how this will work is unclear at this time. We’ll share additional guidance on this and other situations as the information becomes available.
Payroll tax suspension – Open questions
As noted earlier, there are still some unknowns around the payroll tax deferral. Here are a few questions not specifically addressed in IRS guidance.
- Can an employer defer payroll taxes for a subset of eligible employees?
- What kind of unique recordkeeping and documentation requirements apply when an employer defers taxes for employees?
- What happens when an employee leaves the job before the end of the deferral period or before the end of the repayment period? Who would be liable for the repayment?
- Can an employer allow some eligible employees to opt out of payroll tax deferral?
- Does a business have to tell its employees how much tax is deferred or provide balance due information? If so how often?
- Will there be any reporting requirements on Form 1040 or Form W-2?
H&R Block is working to obtain additional information and will share additional payroll tax deferral guidance as it is received from the Department of Treasury or the IRS.
In the meantime, small business owners should be encouraged to speak with their legal and payroll providers for guidance related to the open questions laid out above and any legal considerations that may apply to that business owner’s specific situation.
Help with small business taxes
Have questions about your taxes for your small business? That’s what we’re here for. Learn more about H&R Block Small Business Services.
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The CARES Act offers helpful tax breaks and cash flow solutions for small businesses. Learn how to qualify with advice from H&R Block’s tax and accounting experts.
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