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What Does The Recent Payroll Tax Deferral Mean for Small Businesses?

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Payroll Tax Deferral: What You Need To Know

Confused about what to do following the Payroll Tax Deferral? This article will examine the impact of both deferrals on small businesses and help you proceed in light of the new policies.

The COVID-19 health crisis has wreaked havoc on the American economy.

In a desperate attempt to minimize the damage done to workers, the government has continually stepped in to provide financial relief. Most recently, the president issued an executive order to allow the deferral of employee payroll taxes.

It’s not the first time that the coronavirus aid has targeted payroll taxes, as the CARES Act included a provision that allowed for a similar deferral of the employer portion.

This article will examine the impact of both deferrals on small businesses and help you proceed in light of the new policies.

Let’s get started.

CARES Act – The Employer Portion

The CARES Act included a provision that allows employers to defer their portion of the Social Security tax for all wages incurred between March 27 and December 31, 2020. Fortunately, virtually any business can participate. No special elections are required, and there’s no need to demonstrate that your business has been affected by COVID-19 to qualify.

But remember, this is only a deferral and not a forgiveness of the taxes.

If you choose to participate, you’ll need to pay the first half of your deferred tax bill by December 31, 2021, and the second half by December 31, 2022. If you miss those deadlines, your business may incur expensive failure-to-deposit penalties.

Now let’s take a look at the second type of payroll deferral that was released in a memorandum from President Trump on August 8, 2020.

Executive Order – The Employee Portion

The most recent executive order targets the employee portion of Social Security payroll taxes. Unlike the CARES Act, there is a wage limitation:

Eligible employees are those that make less than $4,000 pre-tax in a bi-weekly pay period (which amounts to roughly $104,000 in salary per year).

The period covered by this deferral is considerably shorter than the CARES Act. It will take effect on September 1, 2020, and continue only through December 31, 2020 (4 months as opposed to 8 months).

The memorandum states that there is a possibility the Secretary of the Treasury will look into forgiving these obligations, but nothing is confirmed yet.

And that’s not the only question outstanding. Guidance on this new order is still a bit thin. Though well-intentioned, it has confused many employers and raised issues regarding implementation.

Next, let’s take a look at how small business owners should handle these payroll tax deferrals.

How Should Small Business Owners Proceed?

The short answer? With caution.

Guidance on the CARES Act has been released, and small businesses are now able to plan effectively regarding the employer payroll deferrals, PPP loans, and various tax credits. Take a look at this list of frequently asked questions for a ton of helpful advice on the subject.

However, this latest employee deferral option presents more potential issues than it does benefits. As an employer, there are several practical problems to address, such as:

  • What if an employee quits before the end of the year?
  • Is the deferral optional? If so, how should businesses tailor their treatment for each employee?
  • What about workers with multiple jobs? Does the $4,000 limit apply to each employer?
  • Will the deferred taxes be payable in the beginning or at the end of 2021 (like the employer’s deferral)?
  • Won’t the costs to implement this new option (in software programming and work-hours) outweigh any tax savings?

Your Safest Course of Action

With all the uncertainty surrounding this latest executive order, the safest option for employers is to continue withholding payroll taxes for now.

As it stands, the potential downsides of passing on the tax deferral to employees are too high. Here are some ways to make this as painless as possible for your employees:

  • Educate your employees on the issues being faced: First and foremost, keep your employees in the loop. Make sure they understand what actions are being taken and why. It will ease their minds and help avoid conflict within your company.
  • Put the funds somewhere safe: Either continue to make tax deposits as usual or stick the cash in a safe account for later repayment. An escrow account or savings account will get you a tiny return on your money without exposing it to any risk in the meantime.
  • Stay tuned for further guidance: Keep in mind that this policy is very new, and even its constitutionality is being debated. More information will surely be released soon. Stay apprised to make informed decisions moving forward.

Consider Getting Professional Guidance

In times of economic uncertainty, it’s more important than ever to get help navigating new financial legislation. The landscape is changing every day, and your time is better spent running your business than trying to keep track of more and more complicated regulations.

If you’d like some help to protect yourself and your employees from potential pitfalls like those discussed above, feel free to send us an email or schedule a free consultation.

Something Wasn't Clear?

Feel free to contact me, and I will be more than happy to answer all of your questions.

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