Your Biggest Payroll Tax Deferral Questions Answered

We asked ADP's Pete Isberg about everything from employee turnover to Social Security implications.

©Natalia Bratslavsky/iStock/Getty Images Plus

FEI Daily asked Pete Isberg, ADP's VP Government Relations, our most pressing payroll tax deferral plan questions, from the implications to employee turnover.

FEI Daily: The IRS came out with their guidance on the payroll tax deferral plan that went into effect on September 1. Did anything interesting or surprising come out of that guidance that financial executives should know about?

Pete Isberg: The guidance was surprising from the perspective of it put 100% of the liability, the and financial responsibility, on employers. Employers will defer, stop withholding Social Security taxes whenever they get around to it between now and the end of the year and accrue liability for each employee that they'll have to collect in 2021.

If they don't collect that from the employee for any reason, the IRS will collect it from the employer regardless. There's no circumstance where somehow an employee leaves abruptly and an employer could say, ‘Dear IRS, please collect this from the employee.’ They'll never do it. The employers are completely liable, completely responsible. They'll be withholding this in equal amounts over four months, starting January 1 through April.

That gets tricky when you're dealing with any turnover. For example, if you have somebody, and you maybe started deferring in September and they actually leave in the end of December, you pretty much said, ‘That's your only opportunity to get that deferral back as an employer.’ But when you do that, that will literally take up one half of that person's paycheck. That's going to be a big surprise. People are getting concerned about that, but that's the reality of it.

FEI Daily: This applies to public, private, and nonprofit companies. Is that right?

Isberg: That's right. Pretty much everybody, including government employers pay Social Security taxes, so if there are employee Social Security taxes, that's all employers, that's all employees. It's a very broad impact.

FEI Daily: What would you say the general attitude is towards the plan?

Isberg:  Very cautious. It's very early. We just got the guidance that we needed on Friday night at 5:00 p.m. We've had a day and a half to think about it, and people are still digesting. But there are a lot of reasons not to be super happy about this. I think basically businesses are going to be reacting to employees or the employees will come out in large numbers and say, ‘Hey, I've heard about this. When are you going to do it?’

One point that wasn't covered in the guidance but that is extremely relevant, it's clear that it's voluntary for employers. They don't have to do it, but the question is do you have to make it voluntary for employees? You would have to give every single employee an explanation of what you're proposing, how it would work, when you're going to withhold the money, what happens if they leave early, and give those employees an opportunity to respond. Give them some time and provide for some mechanisms so that they can respond, and preferably electronically. You don't want to handle paper. Also, design your systems so that people can change their minds. Somebody might opt in and opt out. That's a lot to ask in terms of record keeping. That question applies to a hundred million people, and you got to ask that over the next few days.

You could, as an employer, just say, ‘I'm doing this for everybody,’ but that would be pretty harsh. I think employees are going to have opinions about this because they'll have read about it, and they'll say, ‘This is just a deferral. Why would I want to delay with holding it? I'm just going to have to double pay in January.’

FEI Daily: Can an employee request that his employer continue to withhold his or her taxes so they can avoid getting hit with a larger than normal payment when they file their 2020 returns?

Isberg: That's a business decision. The IRS isn't going to require it. It's up to the employer, but I think it would be very hard for an employer not to do that because you've got more than a handful of employees.

FEI Daily: Who at the company is really going to be responsible for making these decisions?

Isberg: That's a CFO/CEO kind of question. I think they'll need to understand what are the pros and cons of do I have to do this, what are there benefits to doing it?

FEI Daily: What are the benefits?

Isberg: There's the question. Yeah. I mean, not too many. Employees will get an additional 6.2% uptick in their net pay between now and the end of the year, which is kind of okay, but then they just got to pay it back in January, so is that worth doing?

FEI Daily: I know that the president said that he wanted to make it a permanent cut if he's reelected. First of all, is that possible, and second of all, what would that then mean for Social Security?

Isberg: Well, they would require an act of Congress. We typically don't speculate on what Congress may or may not do, but I would be shocked... I think what was anticipated was Congress will enact a limited short-term forgiveness for that particular payroll tax holiday, September 1 through the end of the year. That might happen, but I'd be really surprised if Congress would seriously consider just removing any employee Social Security tax obligation permanently.

FEI Daily: You said that a CEO and a CFO would be the ones to put their heads together and make this decision. What's a resource for them to help them make the right decision for their company?

Isberg: Well, they should definitely check in with the payroll department just to find out if it's feasible because if they use a company like ADP they don't have to do any work. But if they maintain their own payroll system trying to keep up with the tax laws all by themselves, that's going to be a bit of work. Normally Social Security taxes apply for the full year. They apply this in the same way to every employee, and now you've got a rate change that applies in the middle of the year, in fact, smack in the middle of the quarter, and it applies to some employees and not others. It's a pretty big change for payroll systems.

I think some larger employers, if they maintain their own systems or if they use an off-the-shelf software package, they may need to find out can we do this at all, if so, when because if they can't get to it until December, is it worth doing?

One point that we talked to the IRS about, they know people are going to be able to get to this by September 1, but the question is, ‘Can I do this in October, November?’ The answer is clearly yes, and then you have to ask, ‘Well, can I make it retroactive? Can I refund employees the amounts that I withheld in September because my payroll systems weren't ready?’ the answer's no. It's got to be prospective. There are no retroactive changes. If you do implement in December, you're not going back to the prior months, September, October, November, and refunding it all.