IRS Issues Payroll Tax Deferral Guidance Amid Widespread Criticism

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The IRS has issued guidance for businesses that choose to give employees a temporary holiday from their share of the Social Security payroll tax.

Under a presidential executive order issued Aug. 8, employers can defer that 6.2% tax for employees whose taxable wages are less than $4,000 during a bi-weekly pay period — equivalent to roughly $104,000 annually — from Sept. 1 through Dec. 31.

The tax, however, must be repaid next year before May 1 or interest, penalties, and additional taxes will begin to accrue, according to the IRS. The guidance notes that employers can choose to repay the deferred taxes or collect them from employees.

Financial advisory firms and their employer clients, like all other employers with W-2 employees, can choose to participate in this tax deferral.

The Chamber of Commerce and 32 other trade associations had initially opposed the tax deferment on the grounds that it created “a substantial tax liability for employees at the end of the deferral period.” In an Aug. 18 letter sent to House Speaker Nancy Pelosi, D-Calif.; Senate Majority Leader Mitch McConnell, R-Ky.; and Treasury Secretary Steven Mnuchin, the trade groups asked that Congress take action to forgive this liability. Otherwise, they said, the members of their organizations would “likely decline to implement deferral.” 

The IRS apparently responded to the criticism of those groups and others by allowing  employers to foot the deferred tax bill themselves, but that solution is also likely to cause many employers to forgo the program.

Daniel Morris, a managing director at the Morris + D’Angelo accounting firm, “strongly recommends that employers don’t walk, but run, from this poorly designed program.”

The new IRS guidance “indicates the employer is ultimately liable for paying the deferred tax” even though the employer may collect the tax from employees, according to Morris, whose firm has offices in San Jose, California; Los Angeles; and Portland, Ore. “If the employee quits working before the deferred tax is paid, the employer may be responsible for paying the employee’s deferred payroll tax.”

“Failure to pay payroll taxes timely is a major cause of penalties for small employers,” says Claudia Hill, president of Taxmam, which provides tax assistance to individuals, businesses, estates and trusts.

Retired CPA Brian Kroll told ThinkAdvisor in a Saturday email that “uninformed employers along with the uninformed employees — not to mention the mostly uniformed tax professionals  — have one work day to implement” the guidance. “All this will take years to unwind at unspecified cost in time and expense.”

The deferral requires that employers implement a changed payroll system by Sept. 1 that will calculate, but not pay, the appropriate amount of payroll taxes, which concerns payroll firms such as ADP, Morris said.

“There is no payroll system designed to handle this “Payroll Tax Deferral,” says Miklos Ringbauer, the owner of Miklos CPA in Los Angeles. “The unforeseen consequences and challenges associated with the implementation will prove too burdensome for business … We only have to look back to the [Paycheck Protection Program] and its unresolved questions as business owners still face significant uncertainty due to the shifting positions that have been taken.”

In addition, notes Ringbauer, “Only Congress has the authority to waive these tax payments and effectively provide a taxable or tax exemption on this ‘additional income’ for those employee(s) who took the benefit and there is no direction provided at this time.”

Morris concludes: “Frankly, the juice is not worth the squeeze here. We can think of many simpler ways in which an employer could make a two-year interest-free loan to employees and incur none of these headaches.”

“The small amount of benefit for each employee seems out of proportion to the cumulative risk for employers,” says Hill.

Senate Finance Committee Ranking Member Ron Wyden, D-Ore., said in a Sunday statement that “Donald Trump’s scam is obvious — juice paychecks before the election and sock workers with a massive tax bill early next year when he’ll be out of office or never have to face voters again. While many businesses are unlikely to go along with Donald Trump’s fake tax cut, billions could be drained from the Social Security trust fund. This scheme is designed to give Donald Trump a talking point — it won’t benefit workers in any way.”


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