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Deferring Payroll Taxes is a Risky Proposition

August 12, 2020
Jennifer Gatherwright, Esq., M.S. Tax

I make a living helping people with unpaid withholding taxes, so for me, the latest Executive Order allowing deferral of employee’s Social Security tax is good for business. On the other hand, I have a lot of compassion for my clients. It’s hard not to when most of them are small business owners with families to support. So, as a tax professional I am warning people to be wary of deferring Social Security tax payments.

The Social Security tax is made up of two parts – one half paid by the employer and one half that is withheld and paid by the employee. Those who are self-employed pay both halves subject to some credits. Under the CARES Act, employers can already elect to defer the payment of the employer’s portion of Social Security taxes. On Saturday August 8, Trump announced an Executive Order that the employee’s share of Social Security taxes may also be deferred beginning September 1, 2020, through December 31, 2020 for workers earning up to $104,000 per year.

To be clear, these are not tax cuts, only tax deferrals, and because employers are responsible for collecting and paying over both halves of the Social Security tax, if Congress does not act to make the deferrals permanent, all of these taxes must eventually be repaid by the employers. An employee still employed at the same position next year will see increased withholding from their paychecks next year to repay the taxes. For employers it’s worse. If the employee is still around, the employer can theoretically recoup the employee’s portion through additional future withholding, but what employer wants to take that risk?

Following the President’s announcement, Treasury Secretary Steven Mnuchin appeared on FOX News suggesting this new deferral will be voluntary and the decision to withhold for employees will rest with the employer. Treasury Secretary Mnuchin stated, “We can’t force people to participate. But I think many small businesses will do this and pass on the benefits. But I think the President would like to do a payroll tax cut so he’ll go back to Congress when he wins the election and ask Congress to have this money forgiven and have the Social Security trust fund fully topped up so that in no way does this impact Social Security.”