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Payroll Tax Deferral Guidance Leaves Gaps for Companies to Solve

Aug. 31, 2020, 7:00 PM

Major questions remain unanswered after the IRS issued guidance on President Donald Trump’s payroll tax deferral.

The lack of clarity is likely to scare away companies that were already wary of taking advantage of the benefit due to the headaches associated with pausing withholding of the taxes in the short term, only to have to repay them later, tax professionals said.

The Friday notice sheds light on what types of wages and compensation are covered and ultimately places the burden on employers to withhold and pay back the deferred amounts next year. Unanswered questions include how the deferral will interact with state laws and what companies should do if employees benefit from the deferral but leave before the start of 2021.

“I’m not doing it for my own company, and I wouldn’t suggest anybody do it for theirs either,” said Adam Markowitz, an enrolled agent and vice president at Howard L. Markowitz PA CPA.

The deferral, which kicks in Tuesday, applies to the tax that employers typically take out of their employees’ paychecks to fund Social Security. Only employees whose wages and compensation are generally less than $4,000 per biweekly pay period are eligible.

“I don’t have any clients that are eager to implement this,” Diane Gilabert, a CPA and tax partner at Gatto, Pope & Walwick LLP, said Monday.

IRS and Treasury didn’t immediately return requests for comment.

Employees Who Leave

One of the biggest questions is what companies do if they have employees who benefit from the deferral between Sept. 1 and the end of the year but leave their company before the start of 2021.

The notice says employers have from the beginning of January 2021 through the end of April 2021 to withhold the deferred amounts from their employees’ paychecks and pay them back to the government.

But “how are you supposed to recoup from someone who no longer works for you?” said Neil Bradley, executive vice president and chief policy officer at the U.S. Chamber of Commerce. The chamber has previously said many members were likely to decline the deferral.

That problem encompasses not only employees who quit or are fired before the start of the year, but also those who work on a seasonal basis and get their last paycheck before 2021, tax professionals said.

The IRS notice says employers “may make arrangements” to collect deferred taxes from employees but doesn’t elaborate further.

State, Local Laws

Businesses also need clarity on how the payroll tax deferral interacts with state and local laws, as well as collective bargaining agreements.

This is especially important when considering how businesses will recover the deferred amounts from their employees next year, said Robert Delgado, a principal in the compensation and benefits group at KPMG LLP’s Washington National Tax practice.

State law and union contracts “may limit an employer’s ability to seek repayment from employee compensation if there is no enforceable agreement with the employee in place,” according to a KPMG analysis of the guidance.

The firm urged businesses to consult with legal counsel to determine options for repaying deferred amounts, particularly from severance payments or final paychecks.

State law and withholding rules could complicate whether or not a company decides to opt into the deferral, said Marc Gerson, a member at Miller & Chevalier Chartered.

Paying Back?

Paul Merski, executive vice president of congressional relations for the Independent Community Bankers of America, said banks are reluctant to use the deferral because of the uncertainty over whether they have to pay it back.

The administration has been leaning on Congress to forgive the deferred amounts so that they don’t have to be repaid.

“The observation from our bankers is that the intent is good and they would like to offer this,” Merski said. “But logistically and practically, it’s very challenging to implement and redo your payroll systems and payroll software for a very short period of time—and then having to claw it back and the complexities that would cause.”

The beginning of the year is also a less-than-ideal time to increase withholding on employees because it can already be a tough time financially for them, Bradley said. They’re often paying off bills from the holiday season and they face higher healthcare costs because out-of-pocket limits and deductibles have reset, he noted.

So “to all of a sudden, in that environment, double withholding—that is a difficult decision for an employer to make on behalf of an employee.”

Future Reporting

Companies also want to know how the deferral affects their reporting obligations to the IRS.

That concern mainly covers two forms: Form 941—used on a quarterly basis to report income taxes, Social Security tax, or Medicare tax withheld from employees’ paychecks—and Form W-2—used to report employees’ annual wages and the amount of taxes withheld from their paychecks.

On Friday the IRS released a draft Form 941 that includes lines for amounts of Social Security taxes deferred.

That indicates the agency will likely release another draft form later that includes lines for companies to report repayments of previously deferred taxes, said Pete Isberg, vice president of government affairs for payroll software company ADP.

Despite some of the remaining questions, Isberg said ADP should have the basic information it needs to adjust its software. However, it won’t be ready for Tuesday’s effective date.

“I think we will have it done in early September,” he said, noting that the company essentially had only one business day to react to the guidance because it was issued so late Friday.

—With assistance from Colin Wilhelm.

To contact the reporters on this story: Allyson Versprille in Washington at aversprille@bloombergtax.com; Kaustuv Basu in Washington at kbasu@bloombergtax.com; Lydia O'Neal in Washington at loneal@bloombergtax.com; David Hood at dhood@bloomberglaw.com

To contact the editors responsible for this story: Patrick Ambrosio at pambrosio@bloombergtax.com; Colleen Murphy at cmurphy@bloombergtax.com

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