POTUS’s EO on Payroll Tax Deferral Leaves Many Unanswered Questions
It's an interesting time to be in the practice of accounting and tax consulting.
Law, regulatory and other changes are coming in rapid fire succession during this pandemic, as government at all levels try to keep our nation's collective head above water. Often, the changes occur at such a pace that at worst, they seem not very well thought out, or at best, they are vague on the details, leaving it to the bureaucracy to fill in the blanks.
Such is the case with the President's recent executive order, or EO, regarding the deferral of payroll tax withholding at the federal level.
Now, let me be very clear. I am not making a political statement here of any kind either for or against the actions of the President. That is for others to do. But I won't hesitate to point out that this EO comes with so few details and so many unanswered questions, that from my position as a financial consultant, at least at this point, it seems unworkable and likely to have little positive effect.
The President has left the Department of Treasury with a mandate to fill in the many gaps not covered in the EO, and to issue the guidance needed to implement the deferral. All of this needs to be done by September 1, when the deferral kicks in.
For background, the EO defers the collection of the Social Security and Medicare taxes normally withheld from an employee's pay from September 1 to December 31, 2020. The deferral does not apply to the employer's share of those taxes (although a previous relief law passed does allow for employer deferral until a later date).
That all sounds great; I mean, more money in people's pockets, right? But so many questions remain about this that employers and payroll experts are scratching their heads about how to implement the EO in such a short time or even if to do it at all.
For example, is the deferral mandatory? We do not know. With so little time to reprogram complex payroll systems, most employers probably would prefer to opt out. The complications and potential liability issues are just too great.
There is also the uncertainty of who is eligible. The EO does state that it applies to employees who make less than $4,000 per bi-weekly payroll period. But does that include bonuses, commissions, and the like? What about employees that work multiple jobs that when combined may put them over the limit?
Another question is, will this deferred tax have to be repaid? The EO does NOT forgive the tax (POTUS doesn't have that authority), it only defers it (think delays it until later). Forgiving the tax most likely requires Congressional action, something most question will happen at this point. So, do you take the chance on deferring it and “hope” it will be forgiven so you don't have to pay it back later? If not forgiven, when and how will it have to be paid back (i.e., through increased withholdings later, with your income tax return, etc.)? If recovered through future withholding, what if an employee quits their job before it can be recouped? Is the employer then liable? Whew, I'm already tired!
Some creative thinkers have come up with the idea that maybe, just maybe, they should still withhold the tax from their employees and then place them in escrow for the time being. That way, if the tax does have to be repaid eventually, the money will be there to do so. On the other hand, if forgiveness is ultimately granted, the money could then be paid out to the effected employees. While the idea makes a whole lot of sense, at least to me, it's uncertain (surprise, surprise) if this is something that legally can even be done, so I wouldn't suggest it just yet.
Hopefully by now you see my point. Whether you are an employer trying to cope with what to do with this, or an employee who might be affected, so many questions remain. As the saying goes, the devil is in the details. Let's not start spending that money just yet!