New Payroll Tax Deferral Information
On August 8, 2020 the President signed Presidential Memorandum regarding deferment of payroll taxes. It’s important to note that this order relates only to the employee portion of Social Security (6.2%) of FICA and does not affect withholding for Medicare or federal income tax withholding.
The Memorandum is effective for wages paid between September 1, 2020 and December 31, 2020. Applicable wages include wages paid to employees during the above period, but only if the amount of such gross wages is less than $4,000 for a bi-weekly pay period. If wages are paid on the basis of other pay periods, the employer should use an equivalent threshold. The guidance does not give an example but we at PHB CPAs presume this to mean if your employees are paid weekly the threshold is $2,000 and if you’re employees are paid bi-monthly (twice a month) the threshold is $4,333. The employee’s portion of payroll taxes related to social security can be deferred (not withheld). The tax will be later withheld from the employee’s paycheck and remitted to the IRS during the period of January 1, 2021 to April 30, 2021.
Late on Friday August 28, 2020 the IRS released guidance for employers. While the guidance does indicate employers have a choice in participating, Treasury Secretary Steven Mnuchin has said that he “can’t force” employers to stop withholding the payroll tax.
There are multiple reasons a company may not wish to participate. The IRS has stated that it is the employer’s responsibility to withhold and pay the deferred tax or face penalties as of May 1, 2021. This means if an employee leaves the company sometime before April 30, 2021, the employer would be responsible for paying the deferred tax. The guidance does state that if necessary the employer can make arrangements to collect the tax from the employee. However, it’s unclear if arrangements such as collecting it in total from the employee’s last paycheck are permitted. Additionally, many employers are concerned that during the period between January and April 2021, their employees will have double withholdings and this could cause financial difficulties for their employees.
There have been some comments made by some lawmakers that they would vote to forgive the liabilities. However that is far from certain and it has not been discussed whether forgiveness would be granted to all employees or just those whose employer chose to participate.
The US Chamber of Commerce said that many employers won’t implement the deferral because of the difficulties in administering it. ADP TotalSource, a national payroll service company, has said that it will not offer the ability to defer employee Social Security taxes to its clients or their employees at this time. Intuit has said that they are in discussions with the IRS before implementing the change in their popular accounting program, QuickBooks. The AICPA has written a letter to the Treasury department asking for additional guidance for 10 identified open issues.
We would like to give our clients and their employees more definitive guidance on how to implement the Memorandum, but we have many concerns and questions. We will update you as more information is available. If you choose to implement the tax deferral we recommend having a frank discussion with your employees that the amount will be due between January and April of 2021 and that if they leave your employment, you will make arrangements for them to pay it. What those arrangements entail is, for now, up to you and your interpretation of the guidance. We recommend seeking legal advice before asking your employees to sign any agreements. You will need to be able to quickly implement a change when/if we receive further guidance from the IRS. We will keep you updated as more information becomes available to us.