Three weeks ago many of your employees started inquiring about when you were going to stop taking their payroll taxes out and you likely told them you were awaiting guidance and nothing would happen until September 1st. Guess what?? It’s September 1st and employees are starting to ask again. The big picture they need to know is that it’s a temporary delay not a permanent cut.
Late Friday (8/28), the Department of Treasury released some guidance. Many questions remain unanswered, like, can we simply decline to participate in the deferral or what if an employee leaves before they’ve repaid the deferred taxes? The guidance doesn’t provide us an option to not participate and states the employer “may make arrangements to otherwise collect the total Applicable Taxes from the employee”….. which means they’ve never tried to collect money from a terminated employee!
That being said, we will do the best we can with the information provided thus far. Most employees don’t understand that this is a deferral or delay of taxes, not a permanent cut, for employees making $104,000 or less annually. All delayed taxes would need to be repaid by the end of April 2021. Meaning, while most employees would have the chance to get a 6.2% boost in their paychecks for the last 4 months of this year, this could cause them to get slammed with a 12.4% withholding for the first 4 months of 2021. The concern is that once employees get accustomed to the increase in pay, the double down approach to collect at the beginning of the new year may cause them undue financial stress.
The tax deferral has the potential to cause more aggravation and confusion among staff than its worth, so we recommend the opt out approach. The guidance doesn’t provide employers the option to not offer to their employees and we know plaintiffs’ attorneys are always looking to make a quick buck, so we recommend providing employees with the information and let them make an informed decision.
We have drafted a sample letter that you may wish to share with staff to explain the deferral and requires them to complete and sign paperwork to defer their tax for the remainder of 2020. The letter also states that nothing will change on their withholding unless they choose to opt in to the tax holiday. Please contact our office if you would like a copy of this sample letter.