On Monday, August 31, 2020, we provided an overview of the guidance issued by the IRS in Notice 2020-65. This notice addressed the payroll tax deferral in the President’s Executive Order (EO) announced on August 8, 2020.
Update on IRS Guidance
While the IRS has not issued additional formal guidance since Notice 2020-65 was released on August 28, 2020, there have been some interesting developments. Please note the following items concerning Notice 2020-65 and the EO:
We tried again to get in contact with the IRS using the “Notice 2020-65 Hotline” provided by the IRS at the end of Notice 2020-65. We called this Hotline before and left a message but had not received a follow-up call. However, this time when we called, the recorded message offered some additional insights as follows on the payroll tax deferral in Notice 2020-65 (before a caller was able to leave a message):
- The first item in the message states, “If your question is whether the payroll tax deferral is optional, the answer is Yes.” The message indicates that the employee payroll tax benefits offered in Notice 2020-65 are based on relief afforded to taxpayers in IRC Section 7508A, and this relief is optional.
- The message goes on to state: “Employers may, but are not required to, utilize this relief.”
- These two points address some of the uncertainty with the payroll tax deferral program. First, the program is optional. Second, an employer opts out of the program by not participating with the deferral; and instead, prepares and pays their employees’ payroll taxes as they have done all along before the EO was issued. Employers do not need to fill out an IRS form to indicate that they are opting out of this payroll tax deferral.
- The Hotline message indicates that Notice 2020-65 “does not address how an employer chooses to implement the relief in the Notice, and accordingly, nothing precludes an employer from getting employee input on whether to apply the relief.”
- Finally, the message states that employers can decide to collect deferred payroll taxes from employees who no longer work for the employer.
- The “Notice 2020-65 Hotline” phone number is 202-317-5436. It is uncertain if there will be any further updates to the IRS’s message.
Additionally, IRS employees will be part of the EO payroll tax deferral program (as will most other federal employees). Several IRS employees asked if they could opt out of the program and were informed they could not.
It seems, as of today, that many businesses are not adopting this payroll deferral program. But this could change—especially if the Treasury determines or Congress passes legislation that these deferred payroll tax amounts can be forgiven. Employers that have not adopted the payroll tax deferral can still implement the payroll deferral program, even if they missed their first or second payroll period after the program began on September 1, 2020.
Should an Employer be Part of the Tax Deferral Program?
Now that the IRS has issued guidance on the EO payroll tax deferral (and it is uncertain what, if any, future guidance will be issued), employers need to decide what steps to now take. As noted above, the IRS has indicated this deferral program is optional, so employers can determine whether to allow for the deferral for employees or opt out of the program.
The situation with each employer is unique. There are various factors that might impact an employer’s decision, including local labor market issues, employer’s industry, employee turnover, and more. Below, we’ve identified several considerations that could help employers in their decision-making process. These are selected factors and not meant to be all-inclusive.
Considerations that might persuade an employer to opt out of payroll deferral:
- Administrative Burden. An additional administrative burden is imposed on any employer that participates in the deferred payroll tax program. The employer needs to track its employee wages and determine which employees are entitled to the deferral. This can vary from one payroll to the next based on each employee’s wages in the pay period. Once the deferral period is over on December 31, 2020, the employer needs to develop a program to pay back the deferred payroll tax ratably during the first four months of 2021. An employer would also be faced with added communications to employees and assorted individual employee questions that would likely surface.
- No Real Savings. The payroll tax deferral program as it is spelled out offers a tax savings for affected employees over the remainder of 2020, but this savings is then reversed with additional payroll tax owed in the first four months of 2021. Thus, it presents a short-term savings that must be repaid. Many employees might not be interested in the large fluctuations in their payroll taxes and net paychecks, and might prefer to keep their payroll tax steady over this time.
- Double Social Security Tax in 2021. Employees who participate in the plan would save now—but as 2021 begins, would need to pay double the social security tax at a rate of 12.4%. This might impose a tax burden on employees, making it difficult to manage their household expenses as the new year begins.
- Employer’s Responsibility. If an employee leaves, whether by retiring, resigning, firing, etc., the employer is still responsible for paying the deferred payroll tax in 2021. Notice 2020-65 indicates it is the employer that repays the deferred payroll tax in 2021; not the employee. The employer could withhold taxes from its employees; but if an employee has left, the employer would be saddled with this obligation. The employer could seek an arrangement to have the employee repay this amount, but this might create some logistical (and other) issues. If nothing else, it creates an added burden on the employer even if the deferred tax is eventually collected from a former employee.
- High Employer Turnover. As noted, the employer is responsible for the deferred payroll tax and may (or may not) be able to recover this from their former employees. If an employer encounters a high level of turnover, this responsibility to collect the additional tax could result in a significant added cost to the employer.
Considerations that might persuade an employer to be part of the payroll deferral:
- Deferred Payroll Tax Might be Forgiven. One of the main reasons that employers may consider adopting the payroll tax deferral is that the tax might not be deferred, but instead forgiven. The EO notes that the Treasury will seek ways, including possible legislation, to have the deferred tax forgiven. Thus, not only would the employees not have to repay the deferred tax, but neither would the employer. If the employer does not participate in the payroll tax deferral program, however, it is uncertain if it can recoup the payroll savings if this tax is later determined to be forgiven.
- Employee Savings in Time of Need. As the economy recovers from the pandemic, there might still be employees in parts of the country or in certain industries that are struggling financially now. Thus, the deferred payroll tax savings may be just what the employees need over the next several months. Their need now might outweigh the costs they would bear next year once they would have to repay the tax. This is a situation that could vary by employer and location depending on the facts and circumstances of its employees.
- Employer uses Payroll Tax Deferral as Employee Incentive. While labor levels have stabilized, there are some markets where attracting and retaining a work force is a challenge. An employer faced with such a labor market could decide to participate in the payroll tax deferral to provide a savings now for employees. Then, when the deferral needs to be repaid, the employer could inform its employees that it will cover some or all the deferred tax. This approach would add additional costs for an employer, but it could be an incentive to retain and reward employees.
As always, our experts will continue to monitor this situation. Please contact your Sikich tax advisor if you have any questions.