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Payroll Tax Deferral Option Confuses Employers

    Client Alerts
  • September 04, 2020

Following unsuccessful congressional attempts to extend COVID-19 pandemic relief measures, President Donald Trump signed a memorandum that allows employers to defer the employee portion of federal payroll taxes for the remainder of 2020 until the first four months of 2021. The memorandum took effect Tuesday, but it presents a series of unanswered questions for employers attempting to decide how to respond.

Based on current IRS guidance, employers have the option of opting in or opting out of the deferral. Individual employees who disagree with their employer’s choice have no mechanism to elect whether or not to have their payroll taxes deferred. If the employer elects to defer the tax contributions, current IRS guidance indicates that they may be responsible for repaying the taxes if employees quit or are fired and, therefore, cannot or will not repay the deferred amounts. Based on this possibility alone, many employers are electing to opt out of the deferral. Others remain concerned over the ability of their employees to financially withstand double tax withholdings in the first part of 2021.

If the current guidance results in the majority of employers opting out, the White House may change the memorandum to allow for individual employee choice or ask Congress to relieve employers of any repayment obligation. For the time being, employers may decide to defer any final decision on the deferral option until clearer guidance is provided.