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Payroll Taxes

President Trump’s Employee Payroll Tax Deferral – What Your Employees Need to Know?

September 11th, 2020

President Trump issued an executive order that allows employees to defer payroll tax from September 1st to the end of 2020.  While prior relief programs like PPP (Paycheck Protection Program), FFCRA (Family First Coronavirus Response Act) for family, medical leave, employee retention, and EIDL (Economic Injury Disaster Loans) have provided much needed help for many businesses and employees, employers should understand this executive order in more detail and explain it to employees before taking action.

  • Employee payroll tax deferral is for the Social Security tax (6.2%) of the paycheck only and does not change income and Medicare tax withholdings.
  • This is an employee payroll tax deferral and NOT an exemption and can’t be forgiven as a PPP. Employees can defer the social security taxes for four months but will need to pay the taxes in the first four months of 2021.
  • If the employees do not pay it back next year, the employer is fully responsible for the deferred taxes. Therefore, if an employee quits or will no longer be employed, the employer may need to withhold the full amount of deferred taxes on the last paycheck.  This could cause an issue with seasonal or part-time employees.
  • The IRS needs to revise the Employer’s Quarterly Federal Tax Return, Form 941. With the spontaneous order and the extreme short time to implement, it is a great challenge to have a new form ready for 3rd quarter reporting.  The IRS may also need to revise its backend software regarding late penalty calculations, etc.  It should not be surprising that employers may even receive late tax deposit notices from the IRS.
  • The more challenging tasks are for the payroll software and payroll processing service providers to revise their software and processes to accommodate the deferral, record tracking, payroll reporting, and, finally, the re-payment deductions and reporting. For example, Paycheckmanager.com allows users to “exempt” employee Social Security tax or pay additional taxes easily, but it has not been customized specifically for this short-term deferral and pay-back. The executive order specifies that the taxes be paid back in the first four months of 2021, but the specific amounts or processes are not clear at this time.
  • Most payroll software may not be able to accommodate the specific requirements to implement this short-term change, employers may need to track some records on their own if they choose to offer the deferral to their employees.

In summary, unlike other Covid-19 relief programs, employers need to consider all the pros and cons of implementing the employee payroll tax deferral before offering the option to employees. Paycheck Manager will keep our customers updated with the most current employee payroll information that may impact your small business payroll. We are here to ensure our online payroll software is always ready to meet the needs of your small business payroll.

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