Employee Paycheck Deferrals vs. Employer Tax Deferrals

Two separate pieces of legislation with the word “deferral” have been passed in the last six months to provide more cash flow during the pandemic. While one is for employers and the other is for employees, both have left business owners with a number of questions --- particularly if they should capitalize on these deferral options.

CARES Act: Employer Tax Deferral

The CARES Act allows employers to defer the employer’s share of Social Security tax beginning March 27, 2020 through December 31, 2020. They would then have to pay back 50% of the amount by December 31, 2021 and the remaining 50% by December 31, 2022.

Originally, this Act excluded employers who received forgivable PPP loans from also taking advantage of this employer tax deferral – so you may not have paid much attention to it at first. However, the PPP Flexibility Act passed on June 5, 2020 amended this provision to allow all employers to defer taxes, even those who received PPP loan forgiveness.

(For more information about the employer tax deferral option, please visit the IRS list of FAQs.)

Payroll Tax Deferral Memorandum: Employee Tax Deferral

President Trump then issued an executive order on August 8, 2020 that allows eligible employees to defer their Social Security tax payments until 2021. This provision is to provide short-term cash flow for employees. All deferred taxes are expected to be repaid by April 30, 2021 or face interest and penalties for any unpaid balance.

Should Employers Capitalize on Either Tax Deferral Option?

Whether or not you choose to participate with either tax deferral option depends on your cash flow needs and the level of risk you’re willing to take.

The employer tax deferral option per the CARES Act provides short-term cash flow for employers in the amount of 6.2% (the employer portion of social security tax) of your current payroll. For example, if your current biweekly payroll is $100,000 and you have 7 more paydays until December 31, your total deferred tax amount would be $6,200 per payroll, or $43,400. However, this is a tax deferral and not a tax holiday; these taxes will need to be repaid in the amounts of $21,700 by December 31, 2021 and $21,700 by December 31, 2022.
*If you are a Stratus.hr client and would like to learn more about taking advantage of the employer tax deferral, please contact your HR Rep.

The employee payroll tax deferral provides short-term cash flow for employees in the amount of 6.2% (the employee portion of social security tax) of their paycheck. The maximum amount an employee could defer if they were to earn the maximum amount of $4,000 every two weeks is $248 per biweekly pay period. However, this again is a tax deferral and not a tax holiday, with fiduciary responsibility on the employer for repaying these taxes in the event the employee is unable to repay by April 30, 2021. Because of this liability and the large tax bill this would impose on employees in 2021, the NAPEO industry as a whole, along with 32 other associations and business coalitions, sent an official letter declining participation.
*Under the PEO model with Stratus.hr, employee payroll tax deferrals are not an option.

Do we know if these tax deferrals will be forgiven? 

While several political leaders have speculated forgiveness of the deferred employee taxes, this would require new legislation. As is currently written, these taxes must be repaid in full by April 30, 2021 or face interest and penalties on unpaid deferred taxes.

Can any one of my employees defer, or is it an all or nothing? 

This is an interesting question because neither the Executive Memo nor the Treasury Guidance has specified from an individual employee basis if all employees have to participate if just one employee participates. The only guidance is that employers are able to choose whether or not they would like to participate, given the liability it imposes on them.

Are either of these tax deferral options available through Stratus.hr?

The employee payroll tax deferral is not an option under the PEO model with Stratus.hr. However, clients who are interested in deferring their employer social security taxes should contact their HR Rep to make arrangements.

Confused about employee vs employer tax deferral options for Covid-19 relief?

Related articles:

• Employee Retention Tax Credit – Do You Have Money to Claim?
• Consolidated Appropriations Act: Emergency Paid Leave Extended & Second PPP Loan Available
• PEO Clients Fared Better During First Months of COVID-19 Pandemic
• Executive Order for Payroll Tax Deferral: Employers Be Wary