To Defer or Not Defer … That is the Question

On August 8, 2020, President Trump’s Presidential memorandum allowed payroll tax relief for employers. IRS Notice 2020-65 allows employers to defer withholding, deposit, and payment of the employee’s portion of Social Security taxes on wages that are less than $4,000 during a bi-weekly pay period. While this may sound good on the surface, I recommend you think through the ramifications.

First, and the most important thing to remember, is that this is a DEFERRAL of payroll taxes, not an EXEMPTION. Therefore, at some point, your employees will need to ante up and pay the payroll taxes.

Second, while your employees will enjoy a slightly larger paycheck in the short term (September 1-December 31), they will need to make up for the deferral beginning in January 2021. Something tells me that your employees will come down with a bad case of amnesia in 2021, totally forgetting that their paychecks were larger in the fall, when suddenly you double up on their Social Security tax in the Spring.  

Third, if your employee leaves your company, you are responsible for collecting their deferred taxes from their final paycheck. That’s assuming their final paycheck is large enough to cover the 4 months of accumulated deferred taxes.

Remember, the choice to defer withholding and payment of Social Security taxes under this memorandum is OPTIONAL.

While payroll companies are desperately trying to figure out how they are going to record these deferred taxes, you (as a business owner) need to figure out how to track these deferrals in your accounting records as well.

Given the fact that these payroll taxes are deferred means that your Balance Sheet should reflect the unpaid taxes as a liability. This could affect your ability to borrow money, since your liability will continue to increase the amount of taxes that are deferred.

You are, in a sense, giving your employee a “loan” (also known as an “employee advance”) on the taxes that you defer. You will need to track these deferred taxes by employee, so you know who owes those taxes and how much each individual needs to repay, so you can deduct those taxes in the new year. This can create an accounting nightmare depending on the number of employees affected by your decision to defer taxes.

You will want to make sure your employee is fully informed about their responsibility to pay their taxes. The best way to make that happen is to get it in writing. That means having each of your employees sign a form that reminds them that (1) you are deferring their taxes, (2) you will double-up on their deductions beginning January 1, 2021, and (3) you will deduct any remaining unpaid taxes from their final paycheck if they leave your company.  

To defer payroll taxes – or not – is optional.  The choice is yours. Please reach out with any questions you may have.