The U.S. Treasury Department has issued guidance that answers some of the many questions surrounding the employee payroll tax deferral that went into effect September 1st. The guidance, Notice 2020-65, provides welcome explanation and clarification about some issues, but others remain up in the air.
With the coronavirus pandemic still crippling the American economy and Congress unable to agree on additional financial relief, President Trump signed an executive order announcing the deferral on August 8th. Though the goal was straightforward – boosting takehome pay for workers – employers and accountants alike have struggled in the weeks since, wondering how to implement the policy without creating legal or financial risk.
It is important to understand that the tax must still be paid unless Congress passes legislation forgiving the debt. Since the president’s power to alter tax policy is quite limited, his memorandum cannot and does not cancel the tax that is due by law. It simply changes when the tax must be paid, pushing the due date forward. In the interim, employers can stop withholding the tax so workers receive extra money in their paychecks.
President Trump has stated that he will do everything possible to have the deferred tax forgiven if he is re-elected. Nonetheless, the outcome remains uncertain, especially considering that Congress chose not to pass an earlier attempt to have this employee payroll tax forgiven.
What the guidance tells us
The Notice offers clear answers to a few of the practical concerns that have plagued employers and payroll processors. In particular:
- Eligibility – The deferral applies only to workers who earn less than $4,000 in a bi-weekly pay period or equivalent amounts in alternative payroll cycles. The Notice specifies that eligibility hinges on wages falling below this threshold amount per pay period, rather than averaging the pay over multiple paychecks.
- Repayment period – Taxes deferred under the order must be paid back during the first four months of 2021: January 1st through April 30th. Therefore, employees who see a 6.2% rise in takehome pay for the rest of 2020 will bring home 6.2% less than usual during the payback period, absent congressional action to cancel the debt.
- Repayment mechanisms – Employers are instructed to withhold the additional tax due and remit it during the established repayment period. The Notice also specifies, “If necessary, [employers] may make arrangements to otherwise collect the total Applicable Taxes from the employee.” It is unclear whether this is an option open to all or applies only in the case of employees who leave their jobs before or during the payback period.
- Remittance obligations – The obligation to remit payroll taxes remains tied to the act of withholding. Employers that continue to withhold the taxes must remit them as usual; delayed due dates apply only where the tax has not been deducted from employees’ wages.
Should employers implement this temporary deferral? Must they? The answer to the latter question is clear: the payroll tax deferral is optional for employers. They can ignore the order and collect and remit payroll taxes as usual, if they prefer. That’s a very good thing given the last-minute nature of the guidance, which was released just prior to the September 1st implementation.
Besides the practical challenges of implementing changes to payroll systems in such a brief window, there are other considerations for employers. Many remain wary of potential liabilities and are uncomfortable delaying the collection of payroll taxes without clarity around the many issues left unaddressed in the Notice:
- Is it reasonable – or ethical – to subject employees to extra withholding during the payback period without their clear foreknowledge and agreement? If employers offer employees the choice to defer payroll taxes or not, will that create extra confusion and expense for employers in implementing a dual system, where only some workers participate?
- How can employers prevent financial loss stemming from employees who leave their job or are terminated before fully repaying any deferred tax? Would the employer still be liable for this amount?
- Would the amount still owed be considered a legally enforceable debt? And if so, could the employee be forced to sign a promissory note?
- If employers pay uncollectable deferred taxes owed for ex-employees, would this amount constitute additional wages (which would impose still more tax liabilities for the employer)?
It’s no wonder that business owners are worried and unsure how to proceed; the payroll tax deferral for employees creates a deluge of complicated and as-yet unresolved issues. For help determining your best path forward or structuring the optimal implementation approach for your business, reach out to the business advisory pros at Mauldin & Jenkins. We’re here to help.