For employers who decide to offer the optional payroll tax deferral to employees, here are some suggestions to make the process smoother and to help protect both you and your employees.
- Inform your Employees of the optional deferral
If you decide to offer the Social Security payroll tax deferral to your employees, make sure to inform them of the option they have to defer those taxes and also that they can expect an additional Social Security tax deduction on their paychecks from January 1, 2021 through April 30, 2021. Either the employer or the employee has the option to opt-out from this payroll tax deferral relief program. It is not mandatory the employer offer this to employees.
- Inform your Employees they will have to pay it back
It is important to let your employees know that the deferred Social Security taxes will have to be paid back between January 1 and April 30, 2021. Employees are not relieved of the burden of paying the tax eventually.
- Come to an Agreement
To make sure both you and the employees are in agreement, you can have them sign a statement agreeing to additional withholding of Social Security taxes in the period from January 1 through April 30, 2021 until the taxes deferred are fully paid. To prevent any unexpected out-of-pocket costs for your company, you can include in the agreement that employees will reimburse the company for any deferred payroll taxes should the employee leave the company prior to such time when all deferred payroll taxes have been repaid. Ultimately, the employer will be liable for the payment of the deferred tax. Interest, penalties, and additions to tax will begin to accrue on May 1, 2021.
- Make a Plan
Have a plan in place to account for repayment of deferred payroll taxes should any affected employees begin earning less in 2021 than they earned in 2020.
Corporate Payroll Services – Changes to our System
We are implementing changes to our systems to be able to defer the payroll taxes, but employers must be aware of their obligations to eventually pay over the deferred taxes to the IRS. Guidance so far has not made it clear what will happen if an employee terminates employment before the deferred taxes have been collected from the employee, but the IRS guidance, Notice 2020-65, implies the employer will be responsible for the payment of those deferred taxes even though they were never collected from the employee.