Recent guidance on President Donald Trump’s payroll tax deferral is silent on what say—if any—employees have in deciding whether they will opt in or out of it.
The IRS last week released guidance on the deferral, which went into effect Tuesday. The agency answered basic questions but avoided certain topics, including the role employees would play in determining whether their companies will temporarily pause collection of a tax normally taken from their paychecks to fund Social Security.
The lack of clarity could mean that the individuals who are most affected by the policy will have little control over whether their tax withholding changes between now and the end of the year. The IRS and Treasury didn’t immediately return requests for comment.
“The question we have is whether employees will have a the right to opt out in those instances where an employer isn’t offering a choice,” said Robert Delgado, a principal in the compensation and benefits group at KPMG LLP’s Washington National Tax practice.
The payroll tax deferral could create a real hardship for employees at the beginning of 2021 if they are forced to repay the hundreds, if not thousands, of dollars they put off in addition to their normal withholding taxes, said Veena K. Murthy, a principal at Crowe LLP.
“This isn’t really in the best interests of employees,” she said.
A senior administration official said Tuesday that federal employees will have their payroll taxes deferred through the end of 2020. Tony Reardon, national president of the National Treasury Employees Union, indicated that federal agencies won’t let their employees opt out.
“Our request that the payroll tax deferral be optional for federal employees has fallen on deaf ears, which means all federal workers earning less than $104,000 a year will have no choice but to have their withholdings deferred,” Reardon said in a statement Tuesday.
Tax professionals said they are encouraging companies to be clear with employees about the positives and negatives of the tax deferral.
The taxes that are deferred this year will have to be collected by employers and paid back to the government within the first four months of 2021, according to the IRS guidance. That means employees would likely be stuck having twice as much tax taken from their paychecks during those months—an outcome they may want to avoid, especially following a holiday season that may deplete their savings.
Congress would have to pass legislation in order for the deferred amounts to be forgiven.
It is critical for employers to clearly communicate to their workers that the deferral essentially operates as a short-term loan, rather than a tax cut, said Andre Shevchuck, a tax partner at advisory and accounting firm BPM LLP. They also need to explain that the deferral isn’t something that companies can easily turn off and on, and that it make take time for systems to be adjusted, he said.
Without that level of communication, employers are likely to face backlash.
“From the employees’ perspective, they might think, ‘Hey, this directive is supposed to help me, and if you don’t do it as my employer, you’re shortchanging me,’” Shevchuck said.
Some employers considering the deferral are giving their employees a choice to participate because of the potential negative repercussions of double dipping on withholding at the beginning of next year to cover the deferred taxes, Delgado said.
“Employers want to make sure employees are well aware of what this means and how this isn’t forgiveness,” he said.
But allowing employees to have a say is a courtesy, not a requirement, according to Norma Sharara, a managing director at BDO USA LLP. Employers don’t have to listen to their employees’ input if they don’t want to, she said.
Robert Ellerbrock, a partner at FisherBroyles LLP, said it would be an “administrative nightmare” to allow some employees to opt into the deferral and others to opt out, especially since employers could face penalties if they aren’t able to recoup the money.
—With assistance from Lydia O’Neal (Bloomberg Tax) and Saleha Mohsin (Bloomberg News).