Deferred Payroll Tax Guidance

The Internal Revenue Service said companies will be responsible for collecting and paying back any deferred payroll taxes under a directive issued by President Donald Trump aimed at helping workers while Congress continues to be in a stalemate on a stimulus deal.

The agency issued guidance on Friday, August 28th, 2020, to implement the payroll tax deferral for millions of workers from Sept. 1 through the end of the year. These taxes would need to be paid by April 30, 2021,unless Congress decides to forgive those taxes. The guidance was issued just one day before most companies would be processing their first payroll in September.

The guidance states, that if lawmakers don’t step up, then employers must withhold a double deduction from workers’ checks from Jan. 1 through April 30.

The guidance also states that employers “may make arrangements to otherwise collect the total applicable taxes from each employee,” if necessary. However there was no mention on how this can be done legally or what happens if an employee leaves employment. Trying to take all of the unpaid taxes from an employee’s final paycheck would likely violate many state payroll laws.

Employers are instructed that they should explain to each worker that if they choose not to have the Social Security taxes (6.2%) withheld this year that they would be required to withhold twice as much (12.4%) from January 1st to April 30th. The guidance recommends giving each worker the option to opt in or opt out. This means employers could have both, employees who are having taxes withheld and those who are not. This would be an administrative nightmare for most businesses and payroll processing systems.

Because the guidance puts the responsibility on employers for ultimately paying the taxes, that is causing many firms to forego the tax deferral – blunting any potential economic boost the President had hoped for.

ADP vice president, Pete Isberg, said that the challenge of calculating the precise amount due by next April is one of their biggest problems. If there are under ­payments, discrepancies or reconciliation problems, the IRS can assess interest and penalties beginning in May 2021 and these fines would be the responsibility of their clients.

It appears that a significant number of businesses including many Fortune 500 companies are opting out of the deferral all together. UPS, FedEx, JPMorgan Chase, Costco, Home Depot Inc., Wells Fargo, CVS Health have all publicly announced they will continue to withhold these taxes as has the United States Post Office, the House of Representatives and it appears the Senate will too.

After considering the amount of liability each client could face for unpaid taxes and the amount of additional administrative work it would require, we feel that deferring these payroll taxes would not be a prudent decision.  We have a large number of seasonal workers currently who won’t be working in the early months of 2021.  The lack of guidance about what to do if a worker leaves with an outstanding balance due creates a potential liability for us and our clients  We feel the better approach would be to reimburse workers these amounts should Congress decide to forgive the taxes next year.