This podcast episode follows up one posted on Aug. 20 about President Donald Trump's memorandum directing Treasury to defer the withholding, deposit, and payment of workers' 6.2% Social Security or Railroad Retirement tax for the last four months of 2020. Since then, Treasury and the IRS have issued much-anticipated guidance on just how the deferral applies and how the taxes are likely to have to be repaid.
Ed Karl, the AICPA's vice president–Tax Policy & Advocacy, described the memorandum in the first podcast episode. Now he returns to describe what the guidance in Notice 2020-65 provides — and what it still leaves unclear. He has also written a post on the AICPA Insights blog titled "Employee Payroll Tax Deferral — Is It Workable?" that outlines what CPA advisers can tell their business clients with employees about the deferral.
What you'll learn from this episode:
- The notice puts the responsibility for deferring — and repaying — the taxes squarely on employers.
- Although the notice doesn't say so directly, it is clear that employers do not have to participate in the deferral.
- The deferred taxes must be ratably repaid in the first four months of 2021 from wages and compensation of an employee whose payroll taxes were deferred. But what about an employee who leaves the job before that happens or a business that goes under? Employers "may make arrangements to otherwise collect" the taxes from the employee. The notice doesn't elaborate on how they might do that, so we hypothesize.
- We assess efforts that are afoot in Congress on the one hand to forgive the deferred taxes entirely and to overturn the president's memorandum on the other.
Play the episode below or read the edited transcript:
For more news and reporting on the coronavirus and how CPAs can handle challenges related to the pandemic, visit the JofA's coronavirus resources page.
For tax-related resources, visit the AICPA's COVID-19: Tax resources page.
To comment on this podcast episode or to suggest an idea for another episode, contact Paul Bonner, a JofA senior editor, at Paul.Bonner@aicpa-coma.com.
Paul Bonner: Well, thank you, Ed, for joining us for this update on the payroll tax deferral. We spoke last time in our podcast, which was posted on Aug. 20, after President Trump's Aug. 8 executive order but before Treasury had come out with its guidance on Aug. 28. Maybe you should first remind us of what the order's main points are.
Ed Karl: Of course, and thanks for having me again, Paul. The memorandum had a couple of basic elements to it. It was short on a lot of the details, but in essence, it deferred the withholding and deposit of the employee's 6.2% Social Security tax, and it covered the period Sept. 1 through the end of the year, so through Dec. 31. It was limited to employees whose biweekly pay was less than $4,000. The other major element of the memorandum was that it directed the Treasury to explore avenues, including legislation, to eliminate the obligation to pay the taxes back.
Bonner: And we had to await the guidance, which came out, as I said, late last month, in Notice 2020-65. What did it and what did it not provide, that we were looking for?
Karl: One of the major elements that we were suggesting was that the responsibility be placed on the shoulders of the employees. This tax is a tax on employees, and there were a lot of questions about what happens if the tax is deferred but then the employees leave; what if employees don't want to participate; what if they do; all sorts of questions that circled around employees, so we suggested that it be an affirmative election made by employees. And conversely, at the end, employees should be responsible for paying the tax back.
But that's not the approach that the notice took; the notice clearly puts the responsibility on the shoulders of the employer. And one of the things that we spoke about last time was that [Treasury] Secretary [Steven] Mnuchin had said a couple of days after the president released his memorandum that this deferral was optional to the employer. And, indeed, even though it does not explicitly say that in the notice, it is fairly evident that it is optional to the employer, and at the back end, it places the responsibility on the shoulders of the employer to collect the taxes back and to pay them in. So it puts quite a bit of risk on the shoulders of the employer.
Bonner: I suppose once the employer decides to participate in this, the employee has no say in it, right?
Karl: It's not clear; that was one of the open issues. The notice, as I said, puts the responsibility on the employer. It's an option. So let's just say the employer decides that they don't want to participate and they just want to keep things going as normal and that the taxes would continue to be withheld and deposited. What if the employee wants to participate? They want the extra pay.
Bonner: I think they wouldn't be able to in that instance.
Karl: It doesn't appear that is an option they would have. And, conversely if the employer says that they want to participate and they want to defer the withholding of the tax, does that mean the employees have to go along with that? That's a question also. That's not really been answered.
Bonner: As I asked, I think, a couple of times in our last podcast, what is the AICPA saying that members and other advisers should be telling business owners, employers, about this? I think you said each time, "Well, we'll just have to wait and see what the guidance says." And now it's out. And I think there are some things we're saying now to members. What are they?
Karl: There was not any sufficient information to go on from the memorandum; we had to wait for the notice to come out. The notice really was a little bit short on the details as well. So at this point, though, Sept. 1 has come and gone, this deferral is available, and so we have to suggest to our members that they have a conversation with their clients about what is known, what is not known, what the risks are, what benefits there could be for employees, and risks for employees as well. What we know today, it really is what our members should be talking to their clients about. And indeed, what our members should be going through in making decisions for themselves.
Bonner: And I think a list of considerations and suggestions can be found on a blog post that is being posted, right?
Karl: Right, so I drafted a blog; it should be posted very shortly, but, basically, let me walk you through a few of the main points. No. 1, it's important for a conversation to take place about what's in the memorandum and what the notice says, so that's No. 1. So that clients are informed of what the memorandum is trying to achieve.
I think also the base question, then, to inform the client that this is optional, that they do not have to opt into this. It's much like we went through earlier in the year, where there were challenges for filing 1040s around April 15, when everyone was sick, and everyone was just moving to a remote environment, and there were kids underfoot, and it was just a challenge to do things until people got settled. So IRS postponed the filing of 1040s and other returns that were due about that time; they postponed payments that were due around that time until July 15. That did not mean that you couldn't file those returns or make those payments earlier, it just postponed the deadline for doing that.
This is much the same thing that has been done with this notice. It postpones the responsibility to withhold the tax and then to deposit it until a later date. And it leaves it as optional to the employer.
I think one of the big issues that we come across here, though, is what happens for repayment. The notice indicates that starting Jan. 1 — and again, remember, the deferral is from Sept. 1 through Dec. 31 — but starting Jan. 1, 2021, though the end of April, the deferred tax has to be paid back ratably over that period. Any liability responsibility, any kind of penalty, is deferred until May 1, but come May 1, if the entire amount is not paid, the IRS, since this is a trust fund tax, would go after what the Internal Revenue Code calls a responsible party; that's the individual at the employer's level who is responsible for the withholding and payment of this tax. Clearly, the IRS will go after all responsible parties — there could be multiple individuals in the business — to pay anything that didn't ultimately get paid back.
So, a number of questions we talked about last time we spoke, Paul: What happens if an employee leaves before the entire amount is paid back? And certainly, in this economic environment that we face today, where we're doing all these steps, where Congress made PPP [Paycheck Protection Program] loans available for businesses that were at risk. We see a payroll tax deferral because individuals and businesses are at risk. So, it's not far-fetched that we would anticipate that some businesses might not make it to the end of the year, and what happens to all the taxes that they deferred? That's the big issue, the big risk in liability that an employer would take on, as to how they recoup those taxes and pay it to the government.
Bonner: And it could be a considerable amount. I figure that at the top wage eligibility amount, that would come in to just under $2,150 per employee for the entire four months. It's something that many employers, even if they're healthily still doing business, can't afford to lose. So the way it's paid back, as you said, is ratably over those four months, by withholding, presumably, from the employee whose taxes were deferred, and as you say, the employer's left on the hook if that employee is not still working. But, of course, the guidance says that employers can make arrangements to otherwise collect those taxes from the employee, which is a bit vague, isn't it? What are the limits of that? Could it include even something like a promissory note that the employee has to sign in order to participate in the deferral?
Karl: Possibly. You're right, it's completely vague. There's a possibility that they could ask for some kind of a promissory note. I honestly don't know what the legal implications are of that. But just imagine that if a business goes under and their employees are out of a job. Even if they signed a promissory note, how good would that be, what kind of collateral might there be, would they be able to pay anyway? Or, God forbid, what if an employee gets sick and can't work? What do you do then? Really, we're seeing people die, so we're talking about dire circumstances. So, the question then comes up, even if they're allowed to sign a promissory note and they do, is it collectible? And the responsible-party law is not dischargeable under bankruptcy. So, theoretically, the IRS will come after the employer responsible parties to get that money. That's a big consideration to think about in making a decision.
Bonner: Now if, as President Trump says he would like to see happen, Congress, let's just imagine, forgives these taxes entirely. Then everybody who deferred them looks like a genius, right?
Karl: If that were the case, yes, but there obviously is interest by the president in forgiving those taxes. And there is a member of Congress, Kevin Brady of Texas, who is a former chair of the House Ways & Means Committee and currently the ranking member of the Ways & Means Committee, the ranking Republican, and he has expressed some interest in drafting such a bill. So that interest is there, but we haven't heard of other interest in such a bill. That bill would have to make its way through a Democratic House to move any further, and the odds of that are not so large. Also, we're in a presidential election year, so over the next several months, there is a very limited legislative calendar right now. So the odds of a bill like that making its way into law, certainly, by Jan. 1, are really very small. There's also an interest on the Democratic side of looking at the workings of the memorandum to see if the memorandum is viable from a rules perspective. So there is pushing on both sides of this one to see where it goes.
Bonner: So, ultimately, I think the bottom line for employers, or for CPAs to tell their employers, is, each client should make a decision best suited to their circumstances. But you mention liability carriers. Why would that be a concern?
Karl: I think that a good part of it is our conversation about the responsible-party rules and that the trust fund — there's a trust fund penalty for nonpayment of payroll taxes that is equal to the amount of the unpaid taxes. You already started to talk about what the maximum amount might be, in excess of $2,000, if you figure the $4,000 paid biweekly for four months. It's quite a bit of money; that's for one employee. You add that up for all of your employees and then double it for the trust fund penalty if it's not paid; that's quite a lot of money. So there's a bit of risk in making these decisions. That's why I think most of our members, as prudent and trusted business partners, know that conversations with liability carriers, having liability insurance, certainly for CPAs and other businesses, is a prudent way to go. Because of the risks associated, we recommend that there be a conversation with the liability carrier.
Bonner: I'm sure there will be such conversations.
I was wondering: There is something, I think, to prevent an employer from doing this: They would just normally withhold the Social Security tax through the end of 2020, and say, "Oh, wait a minute, because of this order and guidance, I can just hang on to this money and deposit it on April 30 of 2021." That's not possible, is it?
Karl: No, it's not. You're pretty keen on all the details of this, Paul, you're homing in on one of the important ones. The Notice 2020-65 clearly states in the body of the notice that the withholding of the tax is deferred for these four months. But the employer's deferral of the deposit only kicks in because of the deferral of the withholding. So, in other words, once they withhold the tax, they have to pay it. It's only by the deferral of the withholding that there is a deferral of the payment. You have to buy into the whole package. You can't pick and choose here. You could not do what you were asking about, withhold the tax, have that money available, but then not deposit it.
Bonner: And, finally, I think we should point out that a lot of the discussion, the communications that CPAs should have with their business clients, concerns the employee implications, as we've said, whether continued employment is going to be likely, the effect of recouping that tax on the employee. So it seems that even though the employers are on the hook, they have to think about their workers, don't they? That's kind of been a theme throughout this whole COVID-19 period, I think.
Karl: Right. Focusing on the employees is critical. Clearly, the reason for doing this was to increase take-home pay. We know that a lot of people are hurting. The idea of increasing the take-home pay might be appealing for many workers, and this is targeted to try to assist moderate- to lower-income workers. So that's the focus.
On the other end, though, the tax becomes due, so it is a deferral. We spoke a few minutes ago about the idea of the tax being forgiven. There is some interest; clearly, the president would like to see that, and, as I mentioned, a congressman is thinking about a bill, but as I said, the odds of that happening by the first of January are pretty slim. So that means the likelihood is that the employees who might utilize the money over the next four months are going to have to pay it all back starting Jan. 1 through the end of April, ratably over those several months. And then, again, what happens if they leave early? Theoretically, that amount all comes due, and then what will they do? If you work until sometime in December and you owe $1,000 and lose your job, that's not a recipe for — someone automatically having that amount come due — for success. So there's some appeal on the front end, but the employees should be aware of what happens after the four months of deferral and what happens if they leave their job. They should be clearly informed of all those possibilities.
Bonner: I can see the memos going out now. Well, thank you, Ed, for bringing us up to speed on these latest developments. I know it's a matter of keen interest for a lot of our readers and listeners.
Karl: It certainly is. We're getting a lot of questions. I hope for our members to look for this AICPA Insights blog; they'll be able to find it. It'll be pushed out through various channels to our members as well, where it will have the list of considerations that our members should be thinking about as they have conservations with their clients.
Bonner: And we'll also provide a link to it in the introduction to this podcast.
Karl: Great, thanks so much for thinking of me, Paul.