Late on Friday (8/28), the IRS issued much anticipated and needed guidance on the payroll tax deferral that was ordered by President Donald Trump in a presidential memorandum on Aug. 8 (Notice 2020-65). The notice allows employers to defer withholding on affected employees’* compensation during the last four months of 2020 and then withhold those deferred amounts during the first four months of 2021.
The guidance is sorely lacking in many areas and we believe leaves employers and employees in an undesirable position – having to place bets on what the congressional branch our federal government will do. There are many employment situations that are not addressed by the guidance, leaving employers to operate in the dark. The business community despises uncertainty, yet it is the world which we find ourselves playing in.
Wicked important to understand: this is a deferral of employee Social Security tax due, and without congressional action to forgive the payroll tax, it threatens to impose serious hardships on employees who will face a large tax bill in the first four months of 2021.
*Affected employees are those employees who on a per pay period basis earn less than $4,000 per pay period on a bi-weekly basis, or the equivalent based on your pay cycles – approximately an annualized amount of $100,000.
Giveth and Taketh
So how much does an employee “get”… for an employee making an annual salary of $52,000 per year ($1,000 per week) the employee would have an additional $62 in their weekly paycheck, totaling approximately $1,060 over the four-month period of September 1st through December 31st, 2020.
Then what… the employee would be subject to additional withholding, based on the amount deferred, pro-rata, over the 4-month period from January 1st to April 30th, 2021, in order to repay the deferral. Deferred payroll taxes not paid during this period will be subject to interest and penalties. If the employer / employee relationship is terminated prior to repayment the employers “may make arrangements to otherwise collect the total applicable taxes from the employee,” as stated in the release.
While the plan/intent is to have the employees repay the amounts deferred from their paychecks, the guidance puts the ultimate responsibility on the employers for paying back the levies.
This Doesn’t Seem Worth It? Is This Required?
The choice to defer withholding, deposit, and payment of the Social Security taxes is optional. The Secretary of the Treasury Department stated that the deferral would not be mandatory for employers to implement. Further, employees themselves can opt out of having payroll taxes deferred so that they do not get hit with a large bill in 2021.
As the employer, if you have employees who participate, you are required, to collect and remit the deferred taxes during the repayment period in 2021.
What happens if an employee participates in the program during the deferment period in 2020 while working for Company A, and then becomes your employee at Company B, during the repayment period in 2021… I have no idea, nobody does!
Certainly, all businesses are unique so there is no one-size-fits-all approach but here is our attempt at what best practices may/should be…
Overall, without a forgiveness component, we do not feel this is in the best interest of the employer or the employee and would suggest not participating. The program, as currently constituted will be much more of a headache than a benefit and won’t achieve any meaningful economic stimulus.
First and foremost, notify all employees of this action and program.
Our suggestion is to notify them that the business’s default position is OPTING OUT. Now, you the employer, have caused no harm.
If you want, now comes the tricky part, you can allow your employees to OPT IN – this is their action.
For employers who plan on allowing employees to opt into the payroll tax deferral program, here are some suggestions to make the process easier and to protect all involved parties:
- Make sure you inform, in writing, employees that it is expected that deferred Social Security taxes will have to be paid back between January 1 and April 30, 2021.
- Have employees sign a contract agreeing to additional withholding up to twice the normal amount of Social Security taxes in the period from January 1 through April 30, 2021.
- Include in the employee contract the agreement that the employee will reimburse the employer for any deferred payroll taxes should the employee leave the company prior to such a time when all deferred payroll taxes have been repaid. Inclusive of but not exclusive of withholding the amounts from a final paycheck.
- Have a plan in place to account for repayment of deferred payroll taxes should the affected employee be earning less in 2021 than he or she earned in 2020.
- Make sure your payroll team or payroll provider understands its obligations for adjusting paychecks to reflect the deferral and then, next year, adjusting paychecks to repay the deferred amount.
- Monitor your payroll reports to ensure the desired action (or inaction) is taking place.
Good luck! You are going to need it. “Issues” like this are good opportunities for us as business owners to get in front of our employees, show them we are paying attention, show them we care, and show them leadership. As this continues to develop, we will try and provide timely guidance.