Most businesses likely to continue withholding
The option to defer withholding employees’ payroll tax contributions might seem enticing. Furniture retailers and other businesses can boost their employees’ paychecks for a few months at no cost to themselves.
But, digging deeper, some Home Furnishings Association members have found a good reason to say no. The deferral might create a large liability later.
President Donald Trump issued an executive order Aug. 8 that allows businesses to defer withholding their employees’ portion of the Social Security payroll tax from Sept. 1 through Dec. 31. By not withholding the 6.2 percent tax, companies would give workers extra income in every paycheck.
There is a catch, however. A deferral does not erase a tax liability; it only postpones it.
In recent guidance explaining the order, the Internal Revenue Service warned that the applicable taxes must be paid between Jan. 1, 2021, and April 30, 2021, “or interest, penalties and additions to tax will begin to accrue on May 1, 2021.”
That’s a daunting prospect for businesses, because the “applicable taxes” will be owed by their employees.
Several large HFA members decline
“We are continuing to withhold the taxes as we are concerned if these were due later, it would be a burden on our employees,” Trey Smith, vice president of Top 100 retailer Ivan Smith Furniture, said in an email Sept. 1.
“At the current time we are not going to defer withholdings,” Jeff Child, president of Top 100 retailer RC Willey Home Furnishings, added the same day. “As many questions get answered, that may change, but I don’t think so.”
Top 100 retailer Badcock Home Furniture&more has made the same decision. Shannon Collins, vice president of compliance, cited these reasons in an e-mail:
- “From an employee standpoint, the employee will have to pay double taxes in the catch-up period and this, we believe, would place a hardship on our employees. Even though there is a possibility of the tax being forgiven, there is no guarantee that this will happen at this time. If it does, the possibility of them getting a tax break at the end of the year is something that is being considered.
- “Badcock would remain liable for the payment of the deferred taxes no matter if the employee still works for us or not. It will be our responsibility to try to get the funds from the ex-employee, and that would be difficult. An IRS form W-2c would have to be filed for employees that don’t repay so that it will show as additional income. Any deferrals not paid timely, no matter the accounting, calculating or submitting mistake, opens Badcock up to fines and penalties. This will also add to the workload of our teams.”
Employees might have to return the money
Another Top 100 member of the HFA did not want to be named, but its decision is the same. It sent these reasons:
- “Absent further action from Congress, pursuant to the Treasury (IRS) Notice, employers will remain liable for any deferred employee Social Security taxes, regardless of whether they are able to fully withhold such deferred taxes from employees from Jan. 1, 2021, through April 30, 2021, or otherwise able to fully collect such deferred taxes from employees.
- “The Treasury Notice does not provide clear guidance on whether employers choosing to offer the deferral must offer their employees the option to defer or not. Employees also may prefer not to defer because they may be concerned with owing a large amount that would be withheld in early 2021, in addition to the ‘normal’ 2021 employee Social Security tax.”
The order creates a dilemma for businesses
President Trump’s goal in pushing the payroll tax deferral was to put more money into working Americans’ pockets and provide an economic stimulus. But a deferral is the extent of his authority. Only Congress can change tax laws – and leaders of both parties in Congress have shown little interest in eliminating payroll taxes, which fund Social Security.
The order creates a quandary for businesses. If they implement the deferral, they face the challenge of recovering the unpaid taxes from employees next year. If they don’t, employees might think they’re being denied an immediate tax break.
Most businesses seem to be taking the second option. Initial returns from a National Retail Federation survey showed that only one out of 36 companies responding had decided to defer withholding.
Many questions are left unanswered
CalChamber noted that the IRS guidance failed to answer several questions, including:
- Is the payroll tax deferral voluntary for the employer or employee? The notice makes clear that the employer is the affected taxpayer. While the notice does not explicitly say it is voluntary for the employer, it also does not make it mandatory. The notice makes no mention of nor seems to contemplate the employee making the election to defer. Therefore, this would appear to be a decision left to the employer.
- What happens if an employee no longer works for an employer once the deferral is over? Is the employer responsible for the unpaid taxes? The notice implies that the employer is responsible for the deferred taxes but provides that the deferred taxes are to be withheld from employees beginning in January. The notice goes on to state, “If necessary, the (employer) may make arrangements to otherwise collect the total Applicable Taxes from the employee.” But the notice provides no further guidance as to what this might mean. It also provides no guidance on what happens if the person is no longer an employee and the employer is unable to collect the unpaid taxes.
- Must an employer decide by Sept. 1 whether to defer withholding or not? The notice is silent on whether an employer must defer the withholding for the entire deferral period (Sept. 1 to Dec. 31) or whether an employer can start deferring at any point during the deferral period.
It appears that, no matter what decision an employer made initially, that decision can be reversed. However, many HFA members seem to be firm in their positions that deferral is too risky.
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