Days before it was set to go into effect, the Internal Revenue Service (IRS) issued guidance on President Donald Trump’s memorandum for employers to stop collecting the 6.2% levy that is the employee share of Social Security tax.
The memorandum starts today, Sept. 1 and runs through the end of the year. The payroll deferral is supposed to apply to employees making less than $100,000 per year, or roughly less than 4,000 per bi-weekly paycheck. Without Congress’ approval, however, the move doesn’t change how much tax employees and employers actually owe. Thus, if employers stop withholding taxes without any guarantee that Congress will forgive any deferred payments, they could still be on the hook to pay that money to the IRS.
The IRS’s guidance confirms as much, but it puts the onus on employers, as they are responsible for deferring and eventually paying tax to the federal government. Companies would need to pay the deferred tax rate between Jan. 1 and April 30, otherwise penalties, interest and “additions to tax” will begin to accrue on May 1.
When the tax deferral plan was issued on Aug. 8, Pete Isberg, vice president of government relations at ADP, told Workspan Daily that many employers would be unable to program their payroll system to account for this sudden change in a matter of weeks.
“Payroll systems are programmed to literally recalculate with every paycheck to make sure that not only is it 6.2% plus wages, but it goes back through the year to calculate, so there is a year-to-date recalculation that occur[s], so that would have to be disconnected and revised,” Isberg said. “There may be some employers that just can’t do it in 2020. Something of this magnitude is usually a six-month workload.”
Lawmakers have criticized the payroll-tax cut for several reasons. They argue that it doesn’t provide much of a hiring incentive, gives too much money to people who already have jobs as opposed to the unemployed and could destabilize Social Security funding.
Employees who participate in the deferral would receive a short-term boost to their pay but would inevitably see a dip in their take-home pay beginning in January. The reason for that is employers have to pay back the deferred taxes from this fall by April 30, but they also must start applying the payroll tax as per usual next January.
This is why, Isberg said, it’s important for employers that offer this deferral to their employees to clearly communicate this information to them to determine whether or not they would like to participate.
Matters get more complicated for employers in the event of employee separations before the end of the year, as the employer would likely be challenged to recover those deferred taxes from the employee. Thus, they’d be on the hook to pay back the full amount.
“If (employers) do opt to do it, they should make arrangements in advance for this kind of situation (employees leaving the company prior to 2021) to collect the deferred portion of the taxes from employees,” said Deirdre Macbeth, content director, regulatory, at WorldatWork. “Employers will need to consult their state laws to determine the maximum amount they can collect from a final paycheck.”
Macbeth noted that in some states the employer might have the option to take the full or partial owed amount out of the departing employees’ final paycheck. Otherwise, the employer should plan to have an agreement in place to collect a separate check from the employee for the deferred amount, Macbeth said.
“The challenge with the latter arrangement is that it is burdensome to enforce,” Macbeth said. “It’s legally valid but if the employee fails to provide the check the employer would have to pursue legal action in order to collect on it.”
About the Author
Brett Christie is the managing editor of Workspan Daily.