In the ever-evolving economic and political landscape of crisis management, a new memorandum is presenting business owners with the option to defer withholding their employees’ share of the Social Security and Medicare tax.
Treasury Secretary Steven Mnuchin noted in an August 12, 2020 interview that while employers are encouraged to participate, the deferral is not obligatory. Understanding the details and implications of the payroll tax deferral memorandum, as well identifying which questions remain unanswered, will help small business owners decide if participation is ultimately in their company’s and their employees’ best interest.
On August 8, 2020 President Trump signed a memorandum deferring payroll taxes for employees, but the program doesn’t apply to everyone. Here are the details:
• The deferral only applies to the employees’ portion of payroll taxes—not the employer’s portion. Specifically, the 6.2% of wages employees pay in Social Security taxes and the 1.45% they pay in Medicare taxes are eligible for deferral.
• The deferral applies to employee payroll taxes on wages paid from September 1, 2020 through December 31, 2020.
• Only employees making less than $4,000 pre-tax per bi-weekly pay period (roughly $104,000 annually) are eligible for this deferral.
• It is a deferral—not an elimination, cut, or forgiveness. While there is talk of enacting forgiveness of the deferred payroll taxes, at this point there is no provision for it, and absent further action the deferred taxes would have to be repaid.
Weighing the pros and cons
The memorandum leaves a number of questions unanswered and poses several more. Small business owners can consider the following critical points in weighing the pros and cons of participating in the deferral program:
Will it really help my employees?
While a deferral of payroll taxes will mean some extra cash for employees who qualify, it won’t be a windfall, and it won’t be accessible all at once. The deferral is applied per paycheck over the course of the four-month deferral period, so an employee earning $60,000 a year would see approximately $155 more per bi-weekly paycheck. But this brings up the even more pressing point of how the deferred taxes will be repaid. If no provision is made for forgiveness, will employees have to pay double payroll taxes for the first four months of 2021 to repay the deferral? How likely is it that your workforce will have the funds to support repayment starting in January? Does the temporary relief now justify the potential difficulties that could arise when the deferral period ends?
Will it expose my business to financial risk?
In the event that no additional action is taken to provide for forgiveness of deferred payroll taxes, what happens if an employee leaves your company before his or her deferred taxes are repaid in full? Does the uncertainty surrounding forgiveness or repayment place your business at risk for being liable for deferred taxes still owed by employees who have resigned or been let go?
How should it be implemented?
Currently there are no guidelines in place to facilitate implementation of payroll tax deferral, which leaves small business owners without direction on how to manage the deferral should they choose to participate. With September fast approaching, businesses are wondering how to adjust their payroll processing systems to accommodate the deferral, how to handle deferral for short-term employees or those with variable wages, when exactly repayment would start, how repayment would occur, and more.
Is it legally sound?
In addition to these practical considerations, there is also a question about whether the memorandum can stand up to legal scrutiny. The debate concerns whether a memorandum on payroll tax deferral can be issued via executive action without the support of Congress, and calls into question the validity of the program.
Payroll tax deferral carries with it a number of as yet unaddressed questions for business owners to weigh before making a decision about participation. Be sure to consult with your small business tax expert in considering the possible pros and cons of this program for your business and your workforce.
Matt Brady, CPA