Update: Repayment Period Extended for Deferred Payroll Taxes
Under the IRS guidance issued in August 2020, employers were allowed to defer withholding employees' share of Social Security taxes from Sept. 1, 2020 through Dec. 31, 2020. Originally, employers were required to increase withholding and pay the deferred amounts ratably from wages and compensation paid between Jan. 1, 2021 and April 31, 2021, and beginning on May 1, 2021, penalties and interest on deferred unpaid tax liability would begin to accrue.
However, the Consolidated Appropriations Act that President Trump signed at the end of 2020 extended the repayment period through Dec. 31, 2021. Now, penalties and interest on deferred unpaid tax liability will not begin to accrue until Jan. 1, 2022.
Employers in the U.S. have not rushed to offer their workers a suspension of Social Security payroll taxes through the end of the year, given that employees would need to repay those deferred taxes during the first four months of 2021—unless legislation is enacted to forgive this obligation—under guidance the IRS issued Aug. 28.
The payroll tax "holiday," or suspension period, runs from Sept. 1 through Dec. 31, 2020, and applies only to employees whose wages are less than $4,000 for a biweekly pay period, including salaried workers earning less than $104,000 per year.
Companies that suspend collection of employees' payroll tax would collect additional amounts from workers' paychecks from Jan. 1 through April 30 next year to repay the tax obligation.
"It is important to note that the IRS guidance allows, but does not force, employers to postpone payroll taxes for the period starting Sept. 1, 2020 and ending Dec. 31, 2020," said Chatrane Birbal, vice president for public policy at the Society for Human Resource Management. "Also, this guidance only defers Social Security payroll taxes—it doesn't eliminate them, which means this tax will have to be repaid." If repayment is late, employers are subject to interest and penalties, which will begin to accrue on May 1, 2021.
"As a result of these factors, coupled with uncertainty of future policy action, many employers are expected to opt out of participating to avoid dealing with the complexity of implementing a payroll tax deferral and burdening employees with large tax bills next year, " Birbal said.
"Many employers are hesitant to implement the payroll tax holiday, knowing that the repayment period in 2021 could be financially difficult for employees," said Danielle Capilla, vice president of compliance, employee benefits, at Alera Group, an employee benefits broker based in Deerfield, Ill. "Employers are concerned that some employees might not understand the tax holiday is not permanent and requires future repayment, at least in its current status. In fact, most employers I've spoken to on the issue are looking for reassurance that they do not have to offer the payroll tax holiday to their employees."
Many payroll systems are prepared to help organizations that choose to offer their workers the temporary tax break, but few employers are taking up the offer. Some are waiting for additional guidance that may clear up lingering confusion or protect employers from the obligation to pay deferred taxes of employees who leave the job before repaying the deferred tax next year.
SHRM Online has selected the following articles to provide a deeper look at employer considerations regarding the payroll tax holiday.
Decision Left Up to Employers
The payroll tax holiday is not mandatory, so it's possible employers may not participate. There do not appear to be any penalties for nonparticipation, although this could change. If an employer does not pay the deferred payroll tax to the IRS by April 30, 2021, it could be liable for penalties and late fees.
No Requirement to Provide Deferral at Employees' Request
On Sept. 3, an IRS representative said during the agency's monthly payroll industry teleconference that deferring the employee portion of Social Security tax is optional for employers.
"Employers may, but are not required, to utilize the relief" with respect to deferring withholding and payment to the government of the employee portion of Social Security tax that otherwise would be withheld from compensation paid from Sept. 1 to Dec. 31, 2020, the IRS representative said.
Employers, and not employees, have the controlling choice of whether to implement deferrals of the employee portion of Social Security tax, the IRS representative said. Notice 2020-65 had not explicitly addressed whether employers or employees had the controlling choice of implementing this relief.
If an employee wants their portion of Social Security tax to be deferred but the employer does not want to implement the deferral, the employer would not be obligated to implement the deferral. An employer also can choose the degree to which its employees would be involved in the employer's decision to implement deferrals of the employee portion of Social Security tax, the IRS representative said.
Few Companies Saying They'll Participate
"Given the numerous implementation challenges, remaining outstanding questions and the extremely short implementation period, employers are likely to continue withholding and remitting payroll taxes to the Treasury," said Caroline Harris, vice president of tax policy at the U.S. Chamber of Commerce.
"I would say that practically all of the retailers that we've heard from on this issue have decided that they're not going to implement the deferral, or their company hasn't made a decision yet," said Rachelle Bernstein, vice president of the National Retail Federation.
But former CKE Restaurants CEO Andy Puzder said suspending employees' payroll tax through the end of the year would be "very helpful" to small business.
"It would help a lot of people. … and I would encourage employers to give that money to their employees, they need it right now," Puzder said. "If I were running a company right now, I would be giving them that money."
(Fox Business News)
Many Employers Opting Out but Not All
Among the messages posted on the Society for Human Resource Management's members-only SHRM Connect discussion board, in a thread on the payroll tax holiday, were these two responses, both posted anonymously:
- "'ll tell you what we aren't doing. We aren't stopping the deductions now and giving employees a temporary increase to their net pay, only to decrease that net pay even further when they have to start paying it back. …"
- "We are opting in. … Should this be forgiven our company did not want to risk [employees] 'losing out' on these funds. This could be up to $1,900 or so for an employee."
Federal Workers Will Have Payroll Taxes Deferred
The U.S. government will implement an across-the-board payroll tax deferral for about 1.3 million federal employees starting in mid-September, forcing some workers to take a temporary financial boost now that they likely will have to repay next year.
Unions have sharply criticized the government's decision, fearing federal workers may not have a choice in whether to take the deferral—resulting in them receiving smaller paychecks in 2021 until the past-due taxes are paid off.
Adjusting Payroll Systems
Employers that use a payroll firm should look for announcements on how the tax holiday will work, including any notices to employees, said Peter Isberg, vice president of government affairs for payment processor ADP. Given that many September payrolls were already processed in the closing weeks of August, before the guidance came out, "generally it will be shortly after Sept. 1" before Social Security tax withholding could be deferred, he noted.
Payroll services and software companies may need to catch up, said Christian Brim, CEO of Core Business and Financial Services, a business consulting firm. When the guidance was issued, Brim's payroll provider was not equipped to handle the change in withholding, he said.
If companies decide to suspend payroll tax withholding, "It would be a good idea for employers to consult an attorney and have an agreement with employees about how the money would be paid back if they leave," said Tom Wheelwright, CPA, the chief executive of WealthAbility, a financial education platform.
Both Brim and Wheelwright agree that more guidance is needed to clear up lingering questions.
Deciding whether or not to offer the deferral is difficult for small businesses, said Elliot Richardson, president of the Small Business Advocacy Council. They will need to educate employees and explain what it would mean for them financially.
"The takeup rate, I think it's going to be well under 50 percent," said Todd Maisch, CEO and president of the Illinois Chamber of Commerce. "But again, the people that want it, who are we to tell them that having money in their pocket now is worse than having money in their pocket later?"
Delaying the Decision
With so many unknowns, Jonathan Barber, senior vice president of compensation and benefits policy research at Ayco, a financial counseling service owned by Goldman Sachs, is instructing clients to wait for more guidance. "It's a tough call," he said. "I just don't know how an employer is going to implement this based on what's out there and the potential of being left on the hook for this amount if they can't ultimately collect it."
For employers that see the deferral as a benefit to employees who may be struggling, the good news is that they don't have to implement it right away, ADP's Isberg said. "We've talked to the IRS about this," he noted. "They understand that employers are going to need time to do it."
But don't wait too long, he said. The deferral itself only lasts through Dec. 31, but also the taxes are not retroactive.
"If you implement this in October, you cannot make adjustments for payrolls processed in September," Isberg said. "You can't go back and refund employees for the amounts that were deducted for Social Security taxes. It has to be prospective."
Related SHRM Resources:
Notice to Employees of Temporary Social Security Tax Deferral
Notice to Employees Explaining the Decision Not to Defer Social Security Tax Withholding
Workers' Payroll Tax Deferral Express Request
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