You have probably been hearing about the Payroll Tax Holiday executive order signed by President Trump earlier this month. We finally received a little guidance from Treasury on August 29th, via notice 2020-65 (follow this link to the notice: https://www.irs.gov/pub/irs-drop/n-20-65.pdf ). However, there are still a lot of unanswered questions, and we are urging all our clients with employees to carefully consider whether or not to participate.
The deferral is only available for employee portion of Social Security withholding (6.2%). It covers employees earning less than $4,000.00 during “any bi-weekly pay period for September 1 through December 31, 2020.” Any employee earning more than $4,000.00 during any of the pay periods from Sept. 1 – Dec. 31, 2020 are NOT eligible for this deferral.
Starting Jan 1 through April 30, 2021, the tax would have to be paid back through double-withholding of employee social security tax (12.4%). This would potentially create a hardship for many employees who live paycheck to paycheck.
The President has requested the deferral to be forgiven early in 2021, but there does not seem to be a lot of confidence that this will happen.
The Treasury Secretary Mnuchin made a public announcement on August 12th that the deferral would not be mandatory, so we believe it is an optional program, and in fact many employers are choosing not to participate. With the very late date of the Notice, and with so little questions actually being answered by the Notice, it has been impossible for many employers to enact this deferral on early September payrolls, and until we receive better answers from Treasury, we are not recommending implementing it.
Here are answers to some common questions (although some of the “answers” are really more questions!):
- I still can’t tell if it is mandatory. Although the notice was not entirely clear, we believe it is optional. See our external alert for more.
- Are others doing it? Based on what we are hearing, the majority of employers are going to continue withholding and depositing as normal for a number of reasons including the administrative burden and the risk of having to pay it back for employees who are no longer employed there during the repayment period.
- Should I do it or not? This is an individual business decision. An employer must weigh the administrative burden and risk of potentially having to pay for employees who are no longer employed with the potential for employee legal action if the deferred tax is later forgiven. In that regard, only Congress can forgive the tax. Our belief is the chance of later forgiveness is likely small, but President Trump and others have made multiple requests to Congress for action.
- Can I hold the money for employees but not submit it to the government so if it is later forgiven, my employees get the forgiveness? We strongly discourage clients from doing this. The deadline for depositing employee payroll taxes is tied to the deadline for withholding, and the notice only moved the deadline for withholding. If employers still withhold (which is the same as holding it for employees), then they risk failure to deposit or late deposit penalties.
- How can I make sure I get it back from employees and do not have to cover for them? There remains some uncertainty here. In some cases, it may be withheld from other pay, but in some cases, state law governs what can be withheld from employees without a written agreement.
- If an employee leaves and I have to pay it for them, do I gross it up? Yes. This is an employee liability, but because of the withholding rules, the employer remits it on their behalf. If the individual does not have wages for the employer to recoup it from, the employer has covered a personal liability of the employee which is taxable.
- If I do not want to do it, do I just do nothing? Technically, employers can continue withholding and depositing and do nothing. However, given the publicity this deferral has received, we would recommend clients consider communicating to employees why they are not going to do it, and let employees know that it would be a net pay increase through December followed by a net pay decrease for January – April when double the Social Security tax would be withheld and there is no certainty to any future forgiveness.
- Can I have employees elect whether or not they want to do it or is it all or nothing? Although we were hoping for this to be included in guidance, it was not. However, we believe employers can still implement this process if they would like, but since the IRS did not provide a model notice or communication statement for employees, the employer will have to create their own communication and process.
If your employees are asking you about this, you may want to let them know that there is no guarantee that the deferral will be made permanent, and that at present, they would have to double their withholding during Jan 1 – April 30, 2021.
If you have questions, please reach out to your payroll professional and/or your CPA.