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Luke Richardson, Accounting Instructor, Explains the Pluses and Minuses of Payroll Deferral

By Keith Morelli

TAMPA (September 18, 2020) -- The presidential executive order to implement a deferral of federal payroll tax for American workers intends to stimulate an economy mired in the COVID-19 crisis. Beginning on Sept. 1, employers have the option to defer withholding the employee portion of the Social Security tax payments.

Some accountants, however, may urge their clients not to pump that money into the economy just yet, as it likely will have to be repaid to the federal government beginning in January.

Muma College of Business Instructor Luke Richardson, who teaches in the Lynn Pippenger School of Accountancy, has some answers regarding the impact this plan has on taxpayers and government programs.

The money is not a giveaway, a stimulus check or a grant, he said. It is a deferral. Employees who see their paychecks jump because of the plan may have to pay that money back through payroll deductions beginning in January.

“Absent any legislation to forgive the deferred amounts – and very little political will appears to exist for such legislation – amounts deferred will be withheld on wages paid between Jan. 1 and April 30 of next year,” he said. “This is in addition to the usual Social Security tax payments during those pay periods.

“Effectively, the employee portion of Social Security tax payments will be doubled during that four-month period. Any increase in take-home pay observed in 2020 will be offset by an equivalent decrease in take-home pay early next year. “

Who is seeing big jumps in their checks now? Not many, said Richardson, who teaches concepts of federal income taxation and federal taxation of business entities.

“Some employers may choose not to participate,” he said. “In fact, I am aware of no major private employer who is. If an employer does choose to participate, employees may not have an option to opt out. The federal government plans to proceed with requiring deferral for its own workers, including the military.”

Richardson said Social Security could be a casualty of the deferral plan.

“If tax payments deferred in 2020 are recovered in 2021, then there shouldn’t be any adverse long term impact on Social Security retirement benefits,” he said. “But if deferred amounts are forgiven or otherwise not repaid, the financial position of the Social Security program will likely continue to diminish. Some economists question the solvency of Social Security if these taxes are not collected.”

What should taxpayers do with the bump in their paychecks? Richardson offered this advice:

“At this point, there’s little reason to believe tax payments deferred in 2020 won’t be required to be repaid in 2021,” he said. “This is merely a deferral. Thus, unless an employee is otherwise able to plan for and manage reduced take-home pay in 2021, conventional wisdom would suggest setting aside the extra take-home pay to compensate for decreased take-home pay in upcoming pay periods.”