As an economic relief measure for workers amid the Covid-19 pandemic, President Trump in August issued a memorandum allowing employers to defer the employee portion of Social Security taxes from September 1 through the end of the year.

The payroll tax deferral is limited to workers making less than $104,000 a year. A worker making $50,000 would see approximately $62 extra in his or her weekly paycheck.

The deferral is optional to employers and applies only to the 6.2% employee portion of Social Security taxes, not the employee portion of Medicare taxes.

However, concerns about the impact of the deferral have led many private employers to decide not to participate in the plan.

Devil in the details

Of greatest concern is that this is a tax deferral, not tax forgiveness. Under law, the president may only defer – not forgive – certain taxes for up to one year during a national emergency.

That means any taxes deferred in 2020 would, under rules issued by the U.S. Treasury Department, have to be repaid in the first four months of 2021. In other words, the 2020 payroll taxes would be withheld from workers’ paychecks in addition to the 2021 payroll taxes from January through April 2021. Interest and penalties would be assessed against employers for any 2020 payroll taxes not conveyed to the federal government by May 1, 2021.

This would impose a double payroll tax burden on employees during a time when, most experts agree, the U.S. still will be in the grip of the Covid-19 crisis.

Moreover, employers would have to pay the 2020 payroll taxes to the government even for employees who had since resigned.

For example, if Clyde in the shipping department worked through the end of December, then resigned in January, his employer – not Clyde – would still be liable for the payroll taxes that were deferred from his paycheck in 2020.

Another concern is that, since the repayment period is shorter than the deferral period by two days, an additional payday could possibly fall in the deferral period as compared to the repayment period, making repayment amounts per pay period potentially larger than the deferral amounts per pay period.

Even though the deferral period has already begun, employers may still opt in. If you would like information about how the payroll tax deferral could impact your business and your employees, please contact your G.T. Reilly advisor.

We will keep you informed about any further Covid-19 relief programs to come out of Washington, including the next round of stimulus legislation currently being negotiated in Congress.