Deferring Employee FICA May Not Make Sense

• September 1, 2020
• Paul Neiffer

Note – Our intention was to post this yesterday but we had some IT issues.

President Trump provided an executive order to allow employers to defer the employee portion of FICA (the 6.2% tax payroll tax rate) paid between September 1, 2020 and December 31, 2020.

But as we get more details including the IRS issuing Notice 2020-65 on Friday of last week, it appears this is not really a great deal for either the employer or employee.

It does not appear that the deferral is mandatory.  Employers are not required to defer the tax for the employee.  However, if you do elect not to defer you should communicate to your employees the reasons why which we explain below.

You can only defer the employee portion of FICA if the wages for the pay period is less than $4,000 assuming a bi-weekly payroll period (weekly of $2,000, semi-monthly of $4,333.33 and monthly of $8,666.67).  If the pay is over this amount, no deferral is allowed for that pay period for that employee.  This is on an employee-by-employee basis.

The notice indicates the employer is ultimately responsible to remit the deferred FICA tax beginning on January 1, 2021 through April 30, 2021 by deducting the deferred FICA tax out of the employee’s paycheck. 

If the employee leaves before the deferred FICA tax is fully remitted to the government, the employer is allowed to withhold the remaining amount out of the final paycheck.  However, if there is not enough wages to pay the tax, it appears the employer is on the hock for the remainder.  The maximum amount that could be deferred per employee is about $2,150.

The advantage for the employee is a little bit more money in their paycheck between now and the end of the year.  The disadvantage is less money in their paycheck between January 1, 2021 and April 30, 2021.  This is essentially an interest free loan to the employee for a four month period.  What is deferred in September will be due in January, etc.

For the employer, there are only disadvantages.  Extra paperwork is involved in determining if the wage qualifies or not; possibly owing of remaining FICA tax if employee leaves early; and ultimately a responsible person penalty if the tax is not paid by the employer.

The bottom line is that most farmers will skip deferral of this tax.  They will be more likely to defer the employer portion of the FICA tax when they file their Form 943 in January, 2021.  This allows half of that tax to be deferred until December 31, 2021 and half until December 31, 2022 since this was part of the new CARES Act law.  Plus, there is no requirement to mess around with the employee’s paychecks from September 1, 2020 to December 31, 2020.

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