President Trump signed an executive order on August 8th which orders employers to stop withholding the 6.2% FICA/social security tax from employees, effective for paydays from September 1-December 31, 2020. The purpose of this executive order is to put more money into the pockets/paychecks of employees now so they have more to spend to boost the economy. The “payroll tax holiday”, as it has been called, would apply to all employees who “generally earn below $4,000 per bi-weekly payroll”—-some have suggested this means “below $100K per year,” but taken literally, it appears it is geared to those who earn below $104K per year. The order instructs the Treasury Department to issue more guidance to clarify the details of the order, but as of this morning, no Treasury guidance has been released—by the time you get this, hopefully we will have more guidance from Treasury (but not holding my breath since it has now been 12 days!!)
BASIC PROBLEM WITH THE EXECUTIVE ORDER
Our understanding is that an executive order can be issued to “postpone or delay” the payment of taxes (such as extending the due date for paying 2019 personal income taxes from April 15 to July 15th this year), BUT cannot be issued to actually eliminate a tax or to levy a tax—-executive orders can “delay/postpone tax due dates,” but cannot eliminate or create taxes themselves. SO, this order only postpones the due date of employee FICA taxes, and Congress would need to actually pass legislation to “forgive” the actual taxes. Think of this as a “holiday” using a credit card—-the bill will come due after the holiday ends, unless Congress chooses to cancel the holiday debt! Congress has not been inclined to include a “FICA tax cut,” even temporarily, in any of its new pandemic stimulus legislative proposals. President Trump has indicated his desire to work with Congress to eliminate the FICA tax debt once re-elected.
WHO OWES THE DEFERRED/POSTPONED FICA TAX FROM THE HOLIDAY, AND WHEN IS THE BILL/REPAYMENT DUE?
Since Treasury has issued zero guidance about the payroll tax holiday, nobody knows when the FICA taxes postponed would need to be repaid or, for that matter, who even owes the “FICA tax debt.” Some people have speculated that the employees may be required to repay their “short-term tax loans” when they file their 2020 Form 1040 personal tax returns by April 15, 2021, but that is pure speculation. Of greater concern to many employers is the risk of them being “on the hook” to pay the deferred FICA tax when it is required to be paid, since employers are legally obligated to withhold FICA tax from their employees—nobody knows IF an executive order can remove the employer obligation to withhold and remit FICA taxes to the IRS. If employers are required to repay the otherwise withheld FICA taxes, do they withhold the previously deferred FICA taxes from 2020 during 2021 along with the regular 2021 tax withholdings? Can employees afford to have “extra taxes withheld” for 2020 along with 2021 current taxes? Who pays the postponed FICA taxes for employees who are no longer employed in 2021 by the same employer? Based on staying current with daily news about the FICA tax holiday, I have yet to hear of a single employer who has indicated they will discontinue withholding FICA taxes beginning September 1, unless they receive more details from Treasury to include assurances they will not be on the hook for unpaid employee FICA taxes deferred. I am not confident that Treasury can legally remove employers from the obligation to withhold FICA taxes from their employees—-Will the deferred Fica taxes need to be repaid?—Nobody knows. Who will be required to repay the FICA taxes?—Nobody knows. Will Congress enact legislation to later “cancel” the FICA tax deferrals?—-Nobody knows.
EMPLOYER AND EMPLOYEE DECISIONS—-BETWIXT AND BETWEEN
Treasury Secretary Mnuchin has been quoted in the news that “employers can implement the order voluntarily, we can not force them to.” It has also been suggested that employees can make their own decisions to choose or not choose to have the FICA tax withheld or not from September 1-December 31, 2020. Employers who choose to not “offer” the FICA tax deferral to their employees may receive some pushback from employees who may hear of other individuals who talk about their increased paychecks—-so, regardless of the decision which each employer will make, strong consideration should be given to communicating the reasons for the decision to the employee group. Perhaps the employer does not want to put their employees in a possible position of owing the tax back sometime in 2021—perhaps the employer does not wish to take the potential financial risk of being on the hook for not withholding FICA taxes for the last 4 months of 2020. And perhaps the employer is willing to implement the executive order and simply tell their employees they may end up owing the monies back in 2021—and help them calculate how much extra they will see in their paycheck (the “math” is easy, 6.2% of wages for employees earning below $104,000 per annum). From an employee perspective, it would seem that each of them needs to understand they can “elect out” of the FICA tax deferral (or our understanding is that an employee can choose to not participate in the payroll tax holiday).
PRESSURE ON EMPLOYERS TO PROGRAM THEIR PAYROLL SYSTEMS TO COMPLY WITH THE TAX HOLIDAY
Many employers, and certainly all payroll companies such as AccuPay, are concerned with the amount of time available to program their payroll system software to implement the holiday by September 1, 2020. AccuPay is already working with our software companies to prepare for the “holiday,” for employers who implement it (and also for employees who wish to participate). The programming will require both employer and employee options, as well as a calculation of the IRS 941 tax deposit owed from each payroll, and most likely special “coding” of “wages” on which the FICA tax has been deferred. We envision that an employee’s W-2 would include reporting of the amount of FICA tax deferred, which could then be used by taxpayers to pay back when they file their personal income tax returns (not sure of that, but makes sense of special coding to track the postponed FICA tax). We all know that the “devil is in the details” and payroll systems must produce accurate “details!”
SOUNDS CONFUSING, SO WHAT ARE YOU DOING?
AccuPay recently “polled” our staff of 21, and the consensus is to continue paying the FICA taxes to avoid a potential future “tax payback.” From the employer perspective, we believe that our employee group would be responsible and repay their debt if called upon to do so (very little turnover to be concerned about what happens if former employees do not repay). BUT we are more comfortable with not potentially “being on the hook” as an employer to withhold 2020 tax in 2021 and to remit the 2020 tax whether we can withhold or not—-SO AccuPay and our staff are currently in agreement as to “not rolling the dice” on a legislative action in the future to cancel the debt. Employers with high turnover and/or lower paid employees should likely be even more concerned about exposing themselves to potential liability from repayment of the deferred taxes which will come due unless canceled by Congress. IF we knew that Congress would cancel the deferred taxes from being repaid, the answer would be easy—-do not withhold and it is “free money” to the employees—Do we know?—-Not at all
IF YOU CHOOSE TO IMPLEMENT THE PAYROLL TAX HOLIDAY, LET US KNOW!
AccuPay will continue to withhold FICA tax from employees of our clients UNLESS you advise us IN WRITING that you choose to implement the payroll tax deferral. IF you choose to implement the executive order and NOT WITHHOLD FICA taxes starting in September, AccuPay will not withhold for any of your employees through December 31, 2020, UNLESS you advise us of the names of employees who choose to continue withholding. We will make every effort to meet your objectives and as quickly as possible. WE WILL CONTINUE TO MONITOR THIS MATTER FOR GUIDANCE FROM TREASURY AND FOR NEWS WHICH COULD IMPACT YOUR DECISON MAKING REGARDING THE PAYROLL TAX HOLIDAY.