Key Updates for Social Security Tax Deferrals and your Payroll System

Recently, in Notice 2020-65, the IRS provided more guidance for President Trump’s executive order, Memorandum on Deferring Payroll Tax Obligations in Light of the ongoing COVID-19 Disaster.  The executive order, signed into effect on August 8^th, suggests a major change to every employer payroll system in America.  It allows employees to start deferring the Social Security portion of their FICA taxes (part of the required payroll tax withholding) as of Sept 1.  Per the order, they can continue suspending their payment of these taxes until December 31^st, 2020.  This option will only be available to workers who:

• Work for an employer who opts into the tax deferral; and
• Who earn wages that are less than $4,000 for a biweekly pay period, and/or;
• Who earn a salary of less than $104,000 per year. 

Thus far, the IRS has suggested that employees’ deferred payroll tax will be withheld by their employer between January 1 and April 30, 2020.  The White House has also indicated that the eventual goal is to find a way for these deferred taxes to be completely forgiven.  This would require new legislation.  However, there’s no word on how this will work, or if it’s even possible.  (Many legal scholars and political commentators are not optimistic that it is.) 

Payroll system complications and problems

The IRS’s notice and the executive order are missing some key pieces of information that employers and their payroll services need to know,

Key unanswered questions and missing information:

• Will there be penalties for an employer that doesn’t update their payroll management to provide employees the option of withholding their Social Security taxes?
  
• How should employers and their payroll companies handle paying back a deferral by employees who quit before the end of 2020? 
  
• Should employers make this one of their default employee policies, then allow individual employees to opt out?
   
• What if employees meet the requirement for compensation one pay period, but not another?
  
• Payroll providers and many other business providers have publicly spoken out against this deferral program.  In a letter to Treasury Secretary Steve Mnuchin and congressional leaders, 33 business organizations (including the US Chamber of Commerce, the National Association of Manufacturers, and the S Corporation Association) said it would be ‘unworkable’ to implement this program and it was ‘unfair’ for employers to make their staff defer taxes now at the potential risk of increased taxes next year.  
  
• In addition to the concerns around the logistics of the deferral program itself, time is also a factor here.  The National Payroll Reporting Consortium stated that because of the lack of guidance and delay in notice, coupled with the complexity of such a task, many employers simply can’t prepare their payroll system to participate in this program as of September 1, 2020.

General guidance for your own payroll system and this program

As of today, many sources, including prominent law firms, are noting that the best advice for employers is to simply not do anything in their payroll system in response to the IRS notice and executive order.  Since the program brings about so many complications, and businesses apparently will suffer no consequences if they don’t participate, this is the next step that will be the least risky to incorporate into company policy for employees.   

On a separate note, businesses should be advised that they can continue to defer payment of their own portion of FICA taxes on payroll.  As per the CARES Act, they have been able to do this since March 27, 2020 and will be able to continue through December 31, 2020.  Half of the back taxes will be due by December 31^st, 2021 and the other half will be due by December 31, 2022.

As always, it’s best to seek guidance from your accountant or legal counsel to see how these options pertain to you and your business.