In August, President Trump signed an Executive Order to defer withholding and deposit of the employee’s share of Social Security tax, starting September 1^st and continuing through December 31^st.  The order does not affect income or Medicare tax withholding, nor the employer’s share of Social Security, just the half that is normally withheld from employees’ pay.

The idea behind the deferral was to give employees a temporary boost in their take home pay.  On the surface it sounds all well and good, but beware, landmines abound.

First, the deferral only applies if wages are less than $4,000 for a bi-weekly payroll period, or the equivalent amount for other pay periods (for example, $2,000 for weekly payroll).  Therefore, the deferral might apply to some employees and not others.  In addition, for any one employee, the deferral might apply to some pay periods but not others.  For example, if an employee gets a bonus or commission check, that particular pay period may exceed the wage limit and not qualify for a deferral, even though other pay periods might.  That could lead to a roller-coaster of withholding for the remainder of the year.

It is important to be aware the employee’s share of Social Security tax is delayed, not waived.  The employer will be required to collect the delayed tax through extra withholding during the first quarter of 2021, above and beyond the normal withholding which will resume at that time.  If an employee leaves before the shortfall is made up, the employer must withhold the balance in a lump sum from their final check or make other collection arrangements.

Payroll software will take time to reprogram for this anomaly, and it’s possible some systems may even choose not to.  We’re also concerned whether IRS can successfully reprogram their systems in time to reflect this allowance for third quarter payroll filings due in October, which includes September payroll.  Any hiccups on their end could lead to all sorts of notices and headaches through no fault of the employer.

Even under the best of scenarios, this deferral represents a significant disruption to the normal flow of payroll withholding, reporting and tax deposits, which could lead to confusion and a myriad of problems for both employers and employees alike.

It appears the deferral is optional, not mandatory.  It also appears deferring the withholding is solely the employer’s call, and an employee can’t force the withholding to be delayed if the employer doesn’t want to participate.  If an employer wants to skip the hassle and continue withholding as usual however, it may require some well-crafted communication to employees to make the case that it’s in their best interests as well, or at the very least, not a disadvantage.  Remember, this is a timing issue of when the tax will be withheld and deposited, not a tax cut or windfall that employees might miss out on if employers take a pass.

We advise business owners on a wide range of tax planning, accounting and business management issues.  If you would like to explore how we could help you move your business forward, please call for a free, no-obligation appointment.  614-418-1775