Aquent will not be participating in the payroll tax deferral as described in the August 2020 executive order, unless guidance from the government substantially changes. The program has been poorly constructed, poorly implemented, and poorly communicated. As presently described, it is unworkable for a staffing company.
After Congress and the executive branch failed to agree on a follow-up stimulus package to replace the CARES Act, a series of executive orders were made on August 8, 2020. Major provisions of the CARES Act, such as enhanced unemployment insurance, had expired on July 31, 2020. Among the executive orders was one which would allow employees to defer a portion of their payroll taxes for the last four months of this year. Details of how this would work, who it would apply to, and how the deferred taxes would be repaid were absent. The deferral period was set to begin on September 1, 2020.
Last Friday evening, August 28, the IRS came out with their guidance on how the deferral would work, and there are still multiple unresolved questions and problems with the program.
The payroll tax is just being deferred for a few months…unless Congress passes a law to forgive the deferred tax soon.
This is not a tax cut — it is a tax deferral. The tax subject to the executive order is the employee portion of the Social Security tax. This is calculated at 6.2% of wages up to an annual income threshold. Under the executive order, if an employee makes $4,000 or less in a two-week period, the Social Security tax, or 6.2%, can be deferred and not deducted from that person’s paycheck. This works out to a maximum of $124 per week in more take-home net pay — less if someone earns below $2,000 per week.
This sounds great in theory. Pretty much everyone would like lower taxes and more take-home pay. The problem is that employees don’t get to keep the money. It must be repaid to the government by April 30, 2021. It is effectively an interest-free loan that must very quickly be repaid. Now, that isn’t useless. The funds could be used for a short-term need or to temporarily pay down credit card debt or some other obligation. The problem is that when you need to return the funds just a few months later, it really undercuts the benefit.
The only way around having to pay it back is if Congress passes a law sometime in the next few months to forgive the deferred tax. Everyone can make their own estimate of how likely that is to happen, but here are some warning signs:
- Five weeks after the CARES Act expired, there is still no replacement legislation in place and no sign that a breakthrough is imminent.
- The Democratic leadership in the House of Representatives is on record as opposing any payroll tax holiday.
- The Republican leadership in the Senate is on record as opposing any payroll tax holiday.
- Any legislation would have to be enacted before January 1 to really work because many employees that have deferred taxes will begin repaying them then (more below).
- Each day more private companies are issuing statements explaining that they will not participate for the reasons detailed in this post. The major exception is the federal government, which is set to start deferring their employees’ payroll tax, whether the employees want it or not. If you fast-forward a few months, this sets up a situation where federal employees have had lower taxes come out of their checks while most private employees have not. Betting on legislation that would benefit government workers while not benefiting private employees seems like a very bad bet versus something like an agreement on a direct stimulus payment to all citizens below an income threshold.
How the tax would be repaid is unclear.
The IRS guidance issued last Friday night just states that the deferred tax must be repaid by April 30, 2021, with no further details. That leaves it up to each employer to determine how to do it, which really is a very, very bad way to construct policy.
Most employers who are even considering participating seem to have settled on deferring the tax for the last four months of 2020, then doubling it for the first four months of 2021. This would mean that for someone making the maximum salary eligible, $104,000 per year, there would be $0 in Social Security tax withheld in net pay between now and the end of 2020, and then $248/week withheld in the first four months of 2021. This is instead of having $128 per week withheld for the whole eight months.
What happens if you leave a company and who is responsible for paying back the Social Security tax?
The Social Security tax covered by the executive order is just the employee’s half. Aquent is separately responsible for paying an additional 6.2% of each employee’s wages.
You might think that the final obligation to repay the deferred SS Tax would rest with the employee — but you would be wrong. Under IRS guidance, the employer is responsible for remitting any deferred taxes.
You can see that there is an obvious issue about what to do if an employee has had payroll taxes deferred for four months and then is not employed for the first four months of 2021, or if that person’s income fluctuates.
For a staffing company, the situation is far more complicated. By the very nature of the business, there is no way to guarantee that someone who is employed for a certain number of hours at a certain rate for the last four months of this year will repeat that pattern at the beginning of 2021. Some employers have discussed withholding any remaining Social Security tax deferral from 2020 out of an employee’s last paycheck in the first four months of 2021- which could work if you know which paycheck is the final paycheck. That just isn’t possible for a staffing company.
The implementation and communication of this executive order have made it challenging for any company to implement.
The executive order was issued on August 8, 2020. Guidance on how to implement it was finally issued on Friday night, August 28. It took effect on September 1. That left exactly one business day for companies and payroll providers to make changes needed to put it in place.
If you haven’t ever had any experience trying to get changes made to a large mission-critical software package, I can tell you that it takes a lot more than one business day to do it. We use one of the largest providers in the country, and they are simply not ready to implement it now.
The code for calculating Social Security tax is extremely deep within our payroll provider’s software. It is not set up to allow person by person opt-in or opt-out for the last four months of the year. It is not set up to be limit-tested against a $4,000 bi-weekly threshold, especially when someone’s income may fluctuate week to week. If your income isn’t the same each week, whether because of bonuses or commissions or varying hours, any deferral is likely to be limited — but even here, the guidance is very unclear.
Aquent pays its employees weekly — faster than any other staffing company. Our payroll cycle does not match the bi-weekly standard used in the executive order. Other companies pay monthly, which creates a different set of mismatches (one entity that does pay bi-weekly is the federal government, which conveniently matches the payroll cycle in the order.)
Lastly, it is very unusual and problematic that the payroll tax deferral is voluntary. It creates a whole new level of complications for any payroll company trying to implement it. There is no precedence that I can remember where employees at one company would have more or less Social Security tax withheld than someone making the same income at another company. Taxes need to apply to all similarly-situated people equally, or they will be perceived as unfair.