Under an Executive Order signed last month by the President, employers can defer collecting federal payroll taxes from their employees’ paychecks through the end of the year.
Businesses should understand that this is just a deferral of payroll taxes owed; it is not an elimination of the payroll tax. Any payroll taxes that are deferred this year must be paid back in 2021.
If employers choose to stop collecting payroll taxes from employees through the end of the year, it appears that they will need to withhold double from employees’ paychecks for the first four months of 2021. Although the payroll tax deferral might provide a slightly bigger paycheck to employees this year, it could create significant hardship in 2021 when employees have twice the amount of payroll tax withheld from their paychecks. And in the current guidance from the US Treasury, the employer is responsible for paying the deferred taxes if the employer cannot collect double taxes from the employee next year.
Businesses can choose not to participate in this payroll tax deferral; it is completely optional. Due to the difficulty of implementing this payroll tax deferral and the burden of assuming the responsibility of paying back deferred taxes, it appears that most businesses are opting out of participating in this payroll tax deferral.