'It's a Very Confusing Process': The Payroll Tax Deferral, Explained

President Trump’s payroll tax deferral executive order went into effect on Sept. 1, meaning that employers can now temporarily suspend collection of the 6.2 percent federal tax for employees that goes toward social security. The suspension would last through the end of 2020.

Some details, though, are a bit unclear. The short summary is this: If an employer opts in to the payroll tax deferral, select employees who earn less than $4,000 per bi-weekly pay period will no longer have that 6.2 percent taken out of their paychecks. Employees can choose whether or not they want to take the deferral. However, it’s not outright forgiveness, only a suspension. Once 2021 rolls around, that tax will come back, and employees will have to repay the back taxes they deferred until then.

This means that come January, double the usual payroll tax will come out of their paychecks. That repayment period begins on Jan. 1 and ends on April 30.

“It’s a very confusing process,” Adriane Harrison, vice president of human relations consulting at PRINTING United Alliance, Promo Marketing's parent company, told Printing Impressions. “And what it is is it allows employees to choose to defer paying their contribution to social security for up to 17 weeks. It doesn’t say that if you choose to defer on September 1 and you decide to start contributing again on November 1, whether that’s OK. We assume you can defer for part of the time, but we don’t know.”

Adding to the confusion, employers will need to deal with some employees choosing to participate in the deferment program and others opting out. Right now, it’s not clear whether a company can have some employees opt in and others not, or whether it’s all or nothing.

Some other caveats:

• If an employee makes more than $4,000 in bi-weekly pay, they are not eligible for the deferral at all. It is not a phased benefit. For example, an employee making $3,999 every two weeks is eligible, while an employee making $4,001 is not.
• Overtime pay, bonuses and other pay fluctuations could push employees over the threshold certain pay periods and not others. During those periods, the deferral would not be applied.
• Employers are on the hook to pay back deferred taxes even if an employee leaves before the 2021 repayment period ends. That may mean an employer can withhold the entire amount owed in a departing employee's final check.

Speaking specifically about printing companies, in addition to employers in all industries, Harrison laid out what they do know for sure: On Jan. 1, employers need to cover those back taxes from the previous 17 weeks.

“So, we do know that employers are required to do that,” she said. “What this is is a potential disaster for everybody. For employees who have very tight margins and aren’t making their rent or whatever, maybe deferral is the best option. But for most people, deferral will be a disaster because on January 1 they have to start repaying, and it’s going to be less money in their paychecks at exactly the time of year that most employees find paying back holiday credit card expenses and things like that, and it’s really, really hard. In addition, personal income tax is due on April 15. … And so, we have what could be just a crush of financial obligations that would fall upon employees that chose to defer. So, I don’t think that’s been explained. I don’t think people really understand it.”

With little information and conflicting information, what’s the best choice for employers handling payroll or employees weighing whether or not it’s worth it for a little extra money now, knowing it must be repaid later?

“It’s really a best guess scenario, but my best guess is that you can certainly present the information to your employees, but in fairness to them it really must include information not just about the deferral, but about the repayment," Harrison said. “In the situation where you have an employee making about $50,000 a year, they’ll end up deferring—if they end up deferring for all 17 weeks—about $1,000 worth of money that would have gone toward that contribution. That means they have to pay that same $1,000 back during a 17-week period starting on January 1. And that’s not nothing. That’s something, especially in these troubled times. Every dollar matters.”

Her bottom line was that employers should definitely give their employees all of the information about the deferral. If they choose to take it, that’s their prerogative. But it’s crucial that they know the full details. If employees or employers do choose to defer taxes, it would be wise to keep tabs on that money and plan for the 2021 payback period.

“People who recognize it may be an issue for them next year might want to set aside the additional funds they’re getting right now into a high-yield savings account in recognition that their paycheck is going to be lower for the first four months of next year,” Eric Bronnenkant, CPA and head of tax at Betterment, told CNBC.

“Printing companies, and all companies, will look like they’re the bad guy when they start withholding money from paychecks, when it’s really mandated by the federal government,” Harrison added. “They have nothing to do with that decision. But it will be a morale crusher if your workforce thinks you're Ebenezer Scrooge and you’re withholding money right after the holidays.”

You can view the full guidance from the IRS here.