Understanding the Payroll Tax Deferral Program and Its Implications

On August 28, the IRS released Notice 2020-65 to comply with a White House directive, addressing the payroll tax deferral program. However, the guidance brings more questions than answers, especially concerning the potential risks and responsibilities for organizations and employees alike.

What is Payroll Tax Deferral?

The Employee Payroll Tax Deferral (Notice 2020-65) postponed the collection of the employee portion of Social Security tax for the period from September 1, 2020, to December 31, 2020. This deferral applies to the 6.2% tax listed on the withholding statement (W-4) of employees. The eligibility criteria are:

Wages below $4000 for semiweekly pay periods Salaried employees earning less than $104,000 per year

Relief for Workers Amid Pandemic

Initial reactions to the payroll-tax deferral program suggest that it is a form of relief for workers struggling in the current economic environment. However, this program also carries significant risks for both employers and employees. To learn more about the payroll tax deferral program, attend the Compliance Prime webinar.

Implications for Employers

The payroll tax deferral program was initially established by President Donald Trump through a Presidential Memorandum. Under this program, employers are not required to withhold the 6.2% Social Security tax for employee wages from September 1, 2020, to December 31, 2020. While the deferral may seem beneficial in the short term, it also means:

The deferral does not eliminate the obligation to pay the taxes. They will still be due on a future date, possibly leading to a significant financial burden for employers. The percentage of the employee's paypacket may increase temporarily, as it will not include the usual tax deductions. This could create liquidity issues for employees, especially during a pandemic. Future risks include potential penalties and interest if employers fail to meet their tax obligations.

The Financial Vulnerability of Social Security and Medicare

The funding for Social Security and Medicare (Medicaid) primarily comes from payroll tax deductions. The future implications of this deferral are concerning, especially in terms of the long-term sustainability of these programs. Without the tax revenue from payroll deductions:

Medicaid and Medicare may face a financial shortfall, potentially leading to higher costs or reduced services. Without adequate funding, federal disability benefits and pensions may be endangered, leading to future financial insecurity. Retirees may face the loss of healthcare and pensions, as these programs rely on payroll tax contributions.

Conclusion

The payroll tax deferral program aims to provide temporary relief in a difficult economic time. However, it also introduces risks for both employees and employers. To navigate this situation effectively, it is crucial to stay informed and understand the implications of the program on a long-term basis. Join the Compliance Prime webinar to gain a deeper understanding of the payroll tax deferral program and its potential consequences.