Payroll Tax Deferral – Some Questions Answered, Some Not
A few weeks back, I wrote about President Trump's missive regarding the deferral of payroll tax withholding at the federal level (see "POTUS's EO on Payroll Tax Deferral Leaves Many Unanswered Questions" published August 19, 2020). As the title implies, there were so many questions yet to be answered as to make the order virtually unworkable, at least in my opinion.
First, a correction – technically what the President issued was not actually an Executive Order. Rather, it was what is known as a Memorandum. Practically speaking, there is very little difference. Both carry virtually the same weight, and even presidents themselves often use the term interchangeably. But here on out, we'll call it what it is, a Presidential Memorandum, or PM.
Now, back on topic.
As a reminder, the PM directs the Treasury Secretary to use his authority to defer the withholding, deposit and payment of employees' 6.2% Social Security (OASDI) tax for compensation paid between September 1 and December 31, 2020. Further, this can only be done for employees earning less than $4,000 on any biweekly pay period.
On August 28, the IRS issued Notice 2020-65 which purported to give guidance needed to implement the PM. At a mere 2½ pages in length, it may have been the shortest IRS notice I've ever seen, and while there were a few details revealed, still it was rather scant on information.
In a nutshell, the notice states:
- An employer's responsibility to withhold and deposit OASDI taxes compensation paid between September 1 and December 31 is postponed until January 1, 2021.
Did you catch that? Postponed! In other words, it doesn't go away, it's only deferred a few months, and eventually the piper must be paid. Short of action by Congress, this really amounts to nothing more than a short-term loan to the employee.
- The amount deferred would be withheld and deposited (paid) ratably from compensation paid from January 1, 2021, through April 30, 2021. In other words, the employee will have to bear basically double withholding of OASDI during this time until the deferred amount is all paid.
- If necessary (e.g., if an employee leaves before paying back the deferred taxes), an employer "may make arrangements" to otherwise collect the tax. Editorial note: I can see the potential for many employers to be left holding the bag here if an employee leaves and the employer doesn't owe the employee enough in pre-termination pay to fully recover the tax previously deferred.
- If not paid by April 30, 2021, the employer will owe interest and penalties, including that nasty "trust fund recovery penalty" and the "responsible party" rules, both of which you definitely want to avoid.
So, what to do?
It should be noted that the PM merely postpones the due date to withhold and pay the tax, much like Treasury postposed the 2019 tax return deadlines last spring until July 15. It does not preclude earlier withholding and payment; i.e., this thing is optional.
If you are an employer, you need to consider the cost to implement the deferral, including time spent on determining which employees are eligible and which are not (this could change pay period to pay period), as well as possible software reprogramming costs now and again at the beginning of 2021, etc.
You also need to assess the implications to your business and its cash flow if employees leave your employment before the deferred tax is fully withheld.
Also, let's not forget the implications to employees. Deferral means less take home pay next spring, and if they leave their job, it likely is immediately due. And will opting out of the deferral cause employee morale issues among employees expecting to participate? Clear communications with your employees will be key here, whatever you decide.
If you are an employee, you need to consider the implications to yourself as well. Will you be able to handle and plan for the decrease in your take home pay that hits you the first four months of 2021? If you leave employment and there isn't enough residual pay to fully pay back what you "owe", are you prepared to possibly have to write a check to your employer for the difference? Is it really worth the trouble for only a four-month temporary deferral?
A final question I've heard asked is what happens if Congress does pass legislation that permanently forgives the deferred tax, but the employer has opted not to defer the withholding? I understand that at least one member of The House Ways & Means Committee has said he will introduce such legislation, so that is a possibility.
While, of course, I have no crystal ball, my sense of things is that this legislation has little chance of passing in the current political environment, thus, this tax will ultimately have to be paid. Further, I have to believe that if it did pass, there would be some mechanism for "refunding" the taxes that could have been deferred and forgiven, but were not. Possibly a refundable tax credit of some sort, although like every other such credit, that could be ripe for fraud.