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Saturday, September 5, 2020

Problems with Payroll Deferral for Employees

There has already been a lot written about the employee payroll deferral President Trump announced on August 8. This allows employers to not withhold the employee's 6.2% OASDI tax for pay periods from 9/1/20 to 12/31/20, but to instead withhold it later.

Late on 8/28/20 (and right before the start of the weekend), IRS released Notice 2020-65 on how this works. Basically, the employers who opt to defer will instead withhold the tax from the employee pay for January 1, 2021 through April 30, 2021, doing so ratable.

It all means that eligible employees will see slightly higher paychecks for the rest of 2020, but smaller ones for January 2021 through April 2021. The 6.2% deferral for four months is just over one week's worth of pay.

What is the point?  Good question!

President Trump wants to get some cash into hands of eligible employees (those with pay under $4,000 for a two-week pay period or equivalent for a different pay period). Yet, not all of these employees need an extra week of cash only to have to pay it back in the first four months of 2021.

And Notice 2020-65 makes it clear this is the employer's liability. If an employee leaves, I assume most employers will take the deferred tax out of the employee's final paycheck. But if they don't or the final check is not enough, the employer has to pay. And once employees who stay know that, they might as well ask their employer to pay their tax too.

A few observations:

  • If your employer pays your 6.2% tax for you, it is wage income.
  • Reprogramming pay systems usually takes more than the few days between August 29 and when the first paycheck are issued after the 9/1 effective date, so how many employers could even start this for pay on 9/1?
  • Notice 2020-65 says that employers "may make arrangements to otherwise collect the total Applicable Taxes from the employee." What does that mean?
  • If an employer opts in, can an employee opt out? Apparently that is up to the employer.
  • Are there other laws that will prevent employers from withholding the deferred tax in 2021? What about minimum wage workers? Is it a violation of the FLSA for an employer to reduce 2021 pay for a 2020 tax that the employer opted to defer until to 2021? Any state law issues?
  • Politics or help? I aim to stay out of politics with this blog, but it seems too problematic here. I hope journalists and voters are on the watch for campaign statements that the president increased the pay of those making under $104,000 without also saying he decreased it for the first four months of 2021 and increased costs for employers due to the processing and the reality that many employers are going to end up paying some portion of the deferred tax.
  • State and local governments need to opt out! The cost of handling this temporary change and being on the hook for the delayed payroll taxes is more than any state or local government should be misspending limited funds on.
  • Federal employees: As reported by Federal News Network, federal employees including those in the military will have to have this liability shift without any option to elect out.
  • Will this deferred tax eventually be forgiven? While the president says he wants to do that, it will take an act of Congress for this to happen. Given the cost and that most employers and employees are not going to opt into this oddity, it is unlikely we'll see forgiveness.
  • Watch for FAQs from IRS to help explain more items not obvious in Notice 2020-65.
What should employees do if their employer, such as the federal government, requires the deferral and they don't want it and cant' opt out?  Seems to be no reason why the employee can't provide a new Form W-4 to the employer asking for additional federal income tax withholding equal to what the deferred 6.2%  OASDI will be (line 4c). So, take home pay for the rest of 2020 will be the same as before 9/1/20.  Then file as early as possible in 2021 to get your refund of the extra tax paid (assuming you were not already under-withheld) and set it aside to help cover reduced paychecks you'll have through the end of April 30. This will be extra work for the employer, but one their system should already be able to handle, unlike this new temporary OASDI deferral.

Here is a nice summary of the memo and Notice 2020-65 from VP Ed Karl of the AICPA.

What do you think?

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