Payroll Tax Holiday and Unemployment Boost Are in Flux
On Aug. 8, the White House issued a series of memorandums and executive orders to provide relief while Congress continued to debate legislative action. However, there are limits regarding what can be done in the absence of congressional approval, and that has led to confusion about what exactly is being provided.
The most significant and controversial provision is a payroll tax holiday. Starting Sept. 1, employers can pause on collecting the 6.2% employee portion of the Social Security tax. But this is an interest-free loan, not a gift. Absent congressional action, which is unlikely, at some point the employees will have to pay back that amount, and even if they know that intellectually, it can still sting when the bill comes due.
On August 28, the IRS issued its first guidance on the plan. The new guidance notes specifically that tax deferral may apply to payments of taxable wages to an employee that are less than $4,000 during a bi-weekly pay period.
In reviewing the notice, CNN says that companies can start the tax holiday on September 1, but workers will have to pay the taxes by the end of April 2021. Starting in January 1, companies may start withholding extra amounts to make up for the pay periods in which they collected nothing. It isn't clear what will happen in the case of employees who leave the company before the suspended tax is paid back.
CNBC noted that "If the employer doesn’t withhold employees’ share of taxes and the IRS can’t collect them, then the worker is on the hook for the tax."(However, acknowledging the confusion, the article is titled "IRS guidelines put employers on the hook for Trump’s payroll tax break.") This could get complicated—CNBC quoted one CPA as saying this situation was a "compliance nightmare."
In an August 31 article, the TaxNotes news service said that "The notice doesn’t explicitly address how employers should treat the deferred taxes of employees who later quit, and it doesn’t say whether employees can opt out of the program."
Also on August 31, the SHRM noted it was unclear what happens if an employee leaves by yearend, before the company has a chance to recoup the delayed taxes: "The employer remains liable for the employee's share of Social Security taxes…The employer can make repayment arrangements with the employee, such as deducting the amount owed from the final paycheck. Otherwise, the employer would have to pay the balance owed."
Some experts even question whether the temporary suspension is even legal. Inc.com quotes Robert Litan, an economist and nonresident senior fellow at the Brookings Institution, a nonpartisan think tank in Washington, as saying: " … even the temporary suspension of collection of the tax is of dubious legality."
There are other difficulties: What if a worker has two jobs that separately pay less than the $4,000 ceiling but together pay more? And can companies change their payroll systems quickly enough to allow for the September 1 start date? It is hoped that the Treasury Department will provide further guidance. The American Institute of CPAs has formally asked the Treasury Department for Guidance on, among things, whether an employee can opt out of the tax holiday and have their payroll taxes withheld as usual.
What should you do now? Before the most recent guidance, The Society for Human Resource Management quoted Melissa Ostrower and Robert Perry, principals in the New York City office of law firm Jackson Lewis, who " … recommend that employers continue to monitor applicable guidance, but not make any changes to their payroll withholding processes at this time."
Experts seem to agree that despite administration assurances, what is essentially an interest-free loan cannot become a gift without congressional action, and Congress seems to have little appetite to do that.
Another provision is an additional $300 unemployment insurance boost, now that the original $600 has expired. Originally, this was supposed to be $400, with the states kicking in the additional 25%, but when many cash-strapped states balked, the Labor Department removed this requirement. It is unclear how soon those additional payments will go out and how long they will last — probably not beyond Dec. 27.
Those who are entitled to unemployment should contact their state's official site to see if the state is ready to offer the additional payout. It will likely only be available to those who are already receiving at least $100 a week.
Legal challenges, congressional action, and additional Treasury guidance could modify or eliminate these provisions, even as experts debate the details. Don't hesitate to reach out to us with questions about how you should be handling your tax and payroll situation.