Employee payroll tax deferral — Is it workable?
Posted by Edward Karl, CPA, CGMA on Sep 03, 2020
“Security is mostly a superstition. Life is either a daring adventure or nothing.”
— Helen Keller
These perilous economic times are nothing short of a daring adventure. The reason the AICPA created the Coronavirus (COVID-19) resource center and SBA Paycheck Protection Program (PPP) resources for CPAs is to help our members — in your critical trusted adviser role — as you nurse the small business world back to economic recovery.
A memorandum issued by President Trump, mandating the Treasury Department defer the collection and payment of employee payroll taxes, has caused confusion and concern among accountants and businesses. The AICPA submitted a letter to Treasury and the IRS in response, requesting additional guidance and clarification, and providing specific recommendations. Treasury issued its guidance on Aug. 28 in the form of Notice 2020-65.
Context surrounding U.S. Treasury guidance and issues
Congress and the Administration have been discussing what we refer to as phase IV or “CARES 2.0 of coronavirus relief for the country” for the last several months. While there’s been bipartisan agreement on some issues, the House has prioritized assistance to states, the Senate liability relief and the Administration payroll tax deferral. The discussions failed to yield a compromise, and Congress is now on recess until after Labor Day and facing a limited legislative calendar upon return.
In response to the stalemate, on Aug. 8, the president signed four executive actions including the presidential memorandum to allow employees to defer certain payroll tax obligations.
The memorandum directs the Treasury Secretary to use his authority to defer the withholding, deposit and payment of employees’ 6.2% Social Security (OASDI) tax for wages or compensation paid between Sept. 1 and Dec. 31, 2020. Also, the deferral is limited to any employees whose wages or compensation is generally less than $4,000 payable during any biweekly pay period. Finally, the memo directs the Treasury to explore avenues, including legislation, to eliminate the obligation to pay the deferred taxes.
Notice 2020-65 answers some of the questions, but leaves many issues open. The notice indicates:
1. An employer’s responsibility to withhold and deposit OASDI taxes on wages and compensation paid between Sept. 1 and Dec. 31 is postponed until Jan. 1, 2021.
2. The amount deferred would be withheld and deposited (paid) ratably from wages and compensation paid from Jan. 1, 2021, through April 30, 2021.
3. If necessary (e.g., if an employee leaves before paying back the deferred taxes), an employer “may make arrangements” to otherwise collect the tax.
Suggested, appropriate steps when considering the employee payroll tax deferral
1. Communicate the content of the Aug. 8 memorandum and Notice 2020-65 to your clients.
2. Explain that the deferral is optional to employers, in the sense that the notice postpones the due date to withhold and pay the tax but doesn’t preclude earlier withholding and payment.
Similarly, this year, the IRS postponed the 1040 due date until July 15 but didn’t preclude earlier filing. This optional status was confirmed by Treasury Secretary Mnuchin in a public statement.
3. Consider the implementation costs, including reprogramming now and again in January.
4. Consider the implications of employees who may leave before the deferred tax is repaid.
For example, a business that is in economic distress and at risk of closing could be forced to immediately collect the entire amount deferred from employees about to lose jobs. How will employers handle retirements, maternity or paternity leaves, or employees who switch jobs?
5. Consider employee implications.
A) Postponement now will give workers more take-home pay, but starting Jan. 1, the postponed amount comes due. That means the employer would basically double the 6.2% OASDI withholding during the payment period. (Calculate the ratable amount for the exact number.) For employees that cease employment, the entire amount likely comes due.
B) The memorandum directs the Treasury Secretary to consider forgiveness of the deferred amount; however, forgiveness is up to Congress.
The House Ways & Means Committee ranking member, Rep. Kevin Brady (R-TX), has indicated he will introduce such legislation — though the possibility of Congress passing such a law by Jan. 1 is questionable.
C) Some employees may be disappointed if an employer opts out. Clear and complete communications with employees should be offered to mitigate this problem.
D) The deferral also gives the appearance of giving a select group of employees raises in the last four months of 2020 and those same employees pay cuts during the first four months of 2021.
6. The notice places the responsibility of payment of the deferred amounts on the shoulders of the employer.
If the employer does not pay in the deferred amounts by April 30, 2021, they will be subject to interest and penalties, including the onerous “trust fund recovery penalty.”
In addition, the “responsible party” rules allow the IRS to collect unpaid taxes from corporate officers, partnership members, employees and other people responsible for collecting and depositing taxes withheld. Trust fund taxes are non-dischargeable in bankruptcy.
7. Senate Minority Leader Chuck Schumer (D-NY) and Senate Finance Committee Ranking Member Ron Wyden (D-OR) are requesting the Government Accountability Office conduct an expedited review of the memorandum under the Congressional Review Act, a law that could allow Congress to overturn administration regulations.
8. Each client should make a decision that is best suited to their circumstances after considering conversations with liability carriers.
Helen Keller wisely stated: “Optimism is the faith that leads to achievement. Nothing can be done without hope and confidence.”
We live in challenging times. Know that we are here to support you.
Edward S. Karl, CPA, CGMA, Vice President of Taxation, American Institute of CPAs