As we near the end of the 3rd quarter of 2020, the Coronavirus curveballs keep coming. As most of you are aware, the President issued a Memorandum on August 8, 2020 titled “Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster”. The essence of the memorandum is that for the period of September 1, 2020 through December 31, 2020, the employee portion of Social Security taxes may be deferred. The employee Social Security tax deferral would apply to payments of taxable wages that are less than $4,000 during a bi-weekly pay period, or the equivalent amount with respect to other pay periods. It is important to note that each pay period is to be considered separately when determining wages for an eligible employee under this program. Though wages should be considered on a per-pay-period basis, generally speaking, employees earning less than $104,000 per year would qualify for participation. However, an employee that is just above the wage threshold could potentially qualify as well. Guidance does state that compensation excluded from FICA taxes should be taken into consideration for determining the wage base. Based on that, deductions for certain healthcare plans, health savings accounts or flexible spending accounts should be taken in to account. For example, an employee that has an annual salary of $105,000 and made contributions of $1,500 annually to a Section 125 plan, would have a wage base of $103,500 for purposes of this program and would qualify for participation. It’s not safe to just look at the salary of $105,000 and assume that they would not qualify.
Since this is just a deferral of taxes due, it will have to be paid back at some point. Just when we were all hoping 2021 will be “back to normal”, we read further into the guidance and realized that would not be the case if the decision is made to participate in this program. Any tax deferred under this program will have to be paid back between the period of January 1, 2021 and April 30, 2021.
Many concerns have been raised since the release of the Presidential Memorandum and as we waited for guidance to be released from the Secretary of the Treasury. Questions such as the following have certainly been at the forefront:
Are employers required to participate?
How are wages determined for employees that work multiple jobs?
What if an employee quits or is on a layoff during the repayment period?
What if some employees did and some did not want to participate?
Unfortunately, the long-awaited guidance issued on August 28, 2020, was fairly ambiguous. Because of that, decisions should be made based on the facts as they are known as outlined in the guidance. The two main points the guidance addressed were (1) Applicable Wages and (2) Payment of Deferred Applicable Taxes. Details related to these points have been addressed above. The other key takeaway from the guidance is that employers, referred to as “Affected Taxpayers”, appear to bear the burden of repayment. Clearly, if the employee is still under employment, the deferred taxes can be payroll deducted. In situations where an employee is no longer employed or is on a layoff, the guidance states “the Affected Taxpayer may make arrangements to otherwise collect the total Applicable Taxes from the employee.” As far as whether participation is required or not, again, it isn’t specifically addressed in the guidance. The language appears to be directive in nature; however, it does not address the issue of noncompliance or penalties for such. One could discern that participation is voluntary based on this.
Another item of importance is that the President’s Memorandum specifically stated that “The Secretary of the Treasury shall explore avenues, including legislation, to eliminate the obligation to pay the taxes deferred pursuant to the implementation of this memorandum.” It leads one to believe that the program as it exists today could certainly be changed in the future.
Should an employer decide to offer this benefit to its employees, it is important to communicate with their payroll software vendor. The technical modifications to implement this payroll tax change could take some time. Also, be mindful of revised payroll tax reporting. The IRS has issued a draft form of a revised Form 941 for reporting taxes deferred under this program.
It appears that this program is fluid and could evolve over time. Because the guidance does not address a lot of specific concerns, it’s very difficult to give sound advice on whether a city should or should not participate in the program. The best advice MTAS can give is to state the facts as they are known. There are situations where some employees could certainly benefit from this program in the short term. It is important to educate employees on the point that this is, essentially, a loan that will have to be paid back very soon. Each municipality should analyze the program given their own unique environment. It is fair to state that this could provide some complexities in administration, but there are certainly employee relation issues that must be considered as well. MTAS advises that each municipality discuss this with key finance, human resources, and legal personnel to make the best determination for their specific entity.
As new information is released on this issue, MTAS will research and communicate that. As always, should you need anything further related to this, please feel free to reach out to your MTAS consultants.
IRS News Release
Dept of Treasury Guidance
DRAFT of Revised Form 941