Client Alerts Pitfalls of Executive Payroll Tax Deferral

Publication
09.01.20 | By: Thomas Vance

The IRS issued guidance (Notice 2020-65) implementing President Trump’s executive action to defer the employee portion of the Social Security payroll tax. The guidance is brief, leaving employers with questions about whether, and how, to implement the deferral.

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The IRS issued guidance (Notice 2020-65) implementing President Trump’s executive action to defer the employee portion of the Social Security payroll tax. The guidance is brief, leaving employers with questions about whether, and how, to implement the deferral.

The President’s action only defers Social Security taxes. Only an act of Congress can forgive the tax due. Without congressional action, the program amounts to a short-term loan to employees with employers possibly acting as guarantors.

Tax deferral background

On August 8, President Trump signed a Presidential Memorandum that permitted the Treasury Department to defer the employee portion of Social Security taxes for certain employees due to the COVID-19 pandemic. Notice 2020-65 implements that executive order.

The deferral would apply to an eligible employee’s share of Social Security taxes (or the employee’s share of Railroad Retirement taxes) on wages or compensation paid from September 1, 2020 through December 31, 2020. It applies to employees whose wages or compensation, payable during any biweekly pay period, generally are less than $4,000, or an equivalent amount for employees not paid biweekly. This is equivalent to a maximum annualized pay of $104,000. Amounts can be deferred without penalties, interest or additions to the tax.

Related Read: What Does the Executive Action Deferring Payroll Taxes Mean for Employers and Employees?

Note: Under the CARES Act, certain employers can already defer paying their portion of Social Security taxes through December 31, 2020. All 2020 deferred amounts are due in two equal installments — one at the end of 2021 and the other at the end of 2022.

New guidance

The deferred tax must be withheld and remitted by the employer during the period beginning on January 1, 2021 and ending on April 30, 2021. Penalties, interest and additions to tax will begin to accrue on May 1, 2021 for any unpaid taxes.

Based on the guidance, the decision to participate in the program lies with the employer.  In addition, it seems the employer is the “Affected Taxpayer,” responsible for ensuring that the deferred tax is paid and the party who will suffer the penalties and interest that begin to accrue on May 1, 2021.

The guidance leaves it to the employer to “make arrangements to collect the total applicable taxes” from an employee. This allows some flexibility for employers if an employee leaves a job before the deferred taxes are due. However, no additional details are given and, without more, an employer may not have much collateral other than the earned, but unpaid wages, of the employee.  The guidance does not specifically provide authority to withhold 100% of wages for tax purposes. This leaves the employer to navigate the possible application of state and federal laws regarding wage garnishment. 

Pushback from business groups

Before the guidance was issued, several business and payroll groups stated that their members would not implement the deferral. The U.S. Chamber of Commerce and more than 30 trade associations sent a letter to members of Congress and the U.S. Department of the Treasury calling the deferral unworkable.

“If this were a suspension of the payroll tax so that employees were not forced to pay it back later, implementation would be less challenging,” the letter states. “But under a simple deferral, employees would be stuck with a large tax bill in 2021. Many of our members consider it unfair to employees to make a decision that would force a big tax bill on them next year… Therefore, many of our members will likely decline to implement deferral, choosing instead to continue to withhold and remit to the government the payroll taxes required by law.”

The National Payroll Reporting Consortium, a payroll services industry association, stated there are “substantial” computer programming changes that are needed to implement the deferral.

“Payroll systems are designed to apply a single Social Security tax rate for the full year, and to all employees equally,” the consortium explained. “Applying a different tax rate for part of the year, beginning in the middle of a quarter, and applying such a change to some employers but not others, and to some employees but not others, is quite complex. Not all employers and payroll systems will be able to make these complex changes by September 1.”

Going forward

The benefits of this deferral program are uncertain and so are its risks. If you need assistance or have questions about how to proceed at your business, contact us. We can help you decide whether to participate and how to go forward.

If you have questions or concerns regarding this Client Alert, please contact Thomas Vance at tvance@orba.com or your ORBA advisor.

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