Payroll Tax Deferral Program – UPDATE

SEPT 3 UPDATE – The IRS released a little more clarification.  The decision to participate in this payroll deferral program does remain in the employer’s court.  However, we are still unclear whether or not, if the employer does decide to participate, whether the employee still has the option to opt out.  As always we will keep you posted!

President Trump issued a memorandum on Friday, that instructed the IRS to defer payment of employee payroll taxes beginning September through the end of the year.

Before we all get too excited, keep in mind, this is not a waiver of taxes but rather a deferral.  While the President has instructed the IRS to explore avenues to waive the withholding completely, only Congress has that power and, for now, they haven’t given us any indication that will be passed.

In this guidance, which is titled Notice 2020-65, employers have the option to temporarily stop withholding and paying tax on the social security benefits for employees.  Of course, there are guidelines.  This payment deferral only applies to wages paid on bi-weekly paychecks that are less than $4,000, or approximately the equivalent of $104,000 a year.  Therefore, a payroll amount of $3,999 biweekly may have the employee payroll taxes deferred, however, a payroll amount of $4,000 biweekly, is a no go!

Of course the taxes will ultimately have to be paid back and for now, that date is ratably by April 2021.  Everything that is not withheld for the remainder of this year must be repaid between January 1, 2021 and April 30,2021.    The employers who do not pay this back in time will be assessed penalties and interest, which will start to accrue on May 1, 2021.   As stated in the Notice, “If necessary, the Affected Taxpayer (the employer) may make arrangements to otherwise collect the total Applicable Taxes from the employee.”   However, we have to wonder how an employer will negotiate that with each employee.

Let’s break this down a little:

1.            The final decision to participate remains with the employer. Currently there does not appear to be an option for the employee to opt out or to force the employer to opt out.   While I admire the instinct to give more money to employees, it places a real burden on employers.   They must really be able to account for this and be sure to pay it over to the government, timely and accurately.   The memorandum is well meaning, it just may be not quite thought out.   President Trump is likely trying to land a Phase IV stimulus to forgive any of these looming deferrals but obviously we can only speculate for now.

2.            The employer must keep track of the deferral and start to withhold that amount, beginning January 1, 2021 over the four month period ending April 30, 2021.   Presumably a payroll service would keep track of this but, ultimately, the employer would be responsible.

3.            It is unclear what happens if the employee stops working for the company or gets furloughed before the end of April, but it’s hard to imagine that the employer wouldn’t be left holding the bag. The AICPA suggested that the deferral, would be an employee obligation but no further details have been released on this.

4.            Some employers may choose to treat the deferred withholding as positive cash, instead of a potential obligation. That would be dangerous as it is possible that the employer has the obligation to pay back the deferred withholding later and will not have an opportunity to claim poor.

For any client, it is way too early to tell if this deferral is really a cash benefit or an additional drain on their resources. One has to consider how many employees actually are paid at an equivalent rate of less than $4,000.   We don’t even know if employees have a choice.  The cash savings may not be substantial and the client must recall that they will have to start paying that over beginning in January of 2021. Will that create a strain during that period.

 

Finally—Keep in mind that the obligation for the employer to pay over these deferred taxes will constitute a “Trust Fund” obligation of the employer. If they get behind or fail to pay over, not only the owners but their employees who have charge of payroll or the paying of bills may be compelled to pay over a Trust Fund Recovery Penalty. This payroll obligation may not go away.

As always, we will keep you posted on the details as they surface.   We do know that the AICPA has issued a letter to the IRS requesting they issue clarity on at least 10 different issues, so further clarity is likely to arise in these coming weeks.

Sincerely,

Tony Rose

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