As of August 31, non-Federal employers have the option of not taking social security taxes from employee paychecks to give workers more spending money in this oh-so-odd year.
The plan details are wonky, but an employer still has to pay their share of the Social Security tax (6.2% of the pay). Still, the employee will be able to defer having to pay their part (the other 6.2%) until somewhere between January and March. At which time, the employer will be responsible for collecting the money they are not taking now AND the money due to the employee. So they will be paying the employer’s 6.2% and the employee’s 12.4% (covering the current and deferred tax) until the money is paid back. Let’s also be clear; this plan is only about the Social Security tax. You will still be collecting Federal income taxes like always.
So unless an employee either opts out of having money taken out or they stash it and not spend it, there will be big surprises in paychecks just after the first of the year. Now, I’m not a finance person, but it seems this whole scheme is a bad idea and doesn’t achieve what it intends to: stimulate the economy. It defunds Social Security, puts a burden on employee’s finances, and causes employers’ reporting headaches. If the employee quits before January, then the employer is on the hook to pay the employee’s deferred taxes without any way to recoup them because once an employee leaves, you can’t exactly knock on their door and ask for their money that you should have withheld in the first place.
Politics and finance aside, what troubles me most about this program is that many employers will try to implement it, believing it is a good program with benevolent intent (spoiler alert, it’s not), but not fully inform their employees of the options or the consequences. Federal employers, including the military, are required to defer (i.e., not collect) this tax through the end of the year, but the rest of the employers in the US have the choice to participate or not. I urge you to consult your tax professionals and ask not to participate because I can’t see any scenario in which this is good for the business or employees.
If you participate, here are some things to consider to make sure that you aren’t setting your employees up for a negative financial impact in 2021.
Communicate what is happening clearly and often. Make it clear to your employees that this is money that has to be paid back. If they think they will have trouble with that, perhaps let them opt-out on an individual basis or help them with some financial planning that will prevent them from being in a bad spot in the spring.
If you defer withholding and an employee terminates for any reason, you’ll need to make sure to withhold it from their final paycheck, so you don’t get stuck (literally) holding the bag. I can see this being problematic for an employee that you terminate for cause, who will likely already be mad at you, and then you are taking the extra money from final pay on top of it. I don’t see that being a great situation for anyone involved. If you are going to be hiring seasonal employees that won’t be around in January at all, consider taking all the taxes per normal and not letting them be part of the deferral program. If anyone gives notice and leaves before the end of the year, you will need to withhold their portion from the final check and make sure to have them sign an acknowledgment that you are doing so.
Work with your finance and HR teams to over-communicate the consequences of this program and understand that you may see negative workplace issues if they feel they were not prepared adequately for having to pay back what they may wrongly believe is “free money.”
They say never look a gift horse in the mouth, but this one needs to be put out to pasture. It’s bad for employees and employers both. Just say no.