(Photo by Win McNamee/Getty Images)
Last week, I wrote about President Donald Trump’s executive memorandum directing the Treasury Department to defer the withholding of employees’ social security taxes from September until the end of the year. The IRS has decided to turn the tax deferral into a short-term loan, with employees getting an extra withholding between January and April of 2021 to pay back the deferral. Due to the difficulty of implementing the proposal and the unlikelihood that the deferred taxes will be forgiven, most employers are not expected to comply with the order. However, the military and federal employees will get their future paychecks in compliance with the order.
I wondered if there were any businesses that implemented the order despite the criticism. After asking around, I found a business that has begun implementing the tax deferral order in its future paychecks. So I reached out to the business owner to see why and how he is doing this.
I won’t identify the business, but I will disclose that it is a corporation with two employees, one of whom is the sole shareholder and chief executive officer. The other employee is a full-time assistant.
When I asked the CEO why he decided to follow the new deferral rules, he said that he was treating the extra take-home pay as a no-interest loan, and he could use the extra money for the holidays. He was also hoping that Trump will pull some strings and get the deferred taxes forgiven before the end of the year.
I asked the CEO what would happen if his employee’s hours were reduced or was fired or laid off during the repayment period. He said this was unlikely but, just in case, both he and his employee knew about the repayment requirement and the potential consequences of not repaying the loan. They both agreed that if there was a separation, each would be responsible for paying back their portion of the deferred taxes.
Immediately, he ran into problems. The payroll program he was using did not have software updates to implement the deferral rules. When he contacted his payroll company’s technical support, the customer service representative told him that no update was available, but they would contact him if there are any developments. We suspected that his payroll company was not going to participate due to low interest.
I should note that other popular payroll programs have not issued any software updates to accommodate Trump’s deferral order as well.
The business owner then contacted local bookkeepers and payroll servicers to see if they can issue payroll checks with the modified withholdings. Almost all of them declined. One offered to do it but wanted a surcharge which the CEO thought was excessive for a company with only two employees.
So after speaking with his accountant, the CEO decided to modify the payroll tax withholdings himself. He issued paychecks to himself and his assistant last Friday, and both did not withhold their portion of the social security taxes. The taxes that were not withheld were recorded in a separate ledger so he will know how much to pay back during the repayment period. The total deferred amount will be given to his employee every pay period so she will know how much to pay back.
I wondered how this modified withholding would be reported on his next employment tax return (Form 941). It turns out that the IRS has issued a draft Form 941 that allows employers to report the employee’s deferred share of social security taxes pursuant to the order. In a few weeks, we will see if this draft version becomes the final version due on October 31.
Right now, the IRS does not require employers to abide by Trump’s deferral order. But if he wants more businesses to participate in his order, there needs to be guidance on forgiving the deferred taxes that was suggested in his executive memorandum. I mentioned last week that Section 7122 of the Internal Revenue Code allows the IRS to compromise existing liabilities. The IRS can modify its final draft of the Form 941 to include a forgiveness provision for the deferred taxes. Most businesses will start filing Form 941 employment tax returns starting in October so the Treasury Department has almost a month to make this adjustment.
If small businesses want to participate in Trump’s order, they should take some precautionary steps to avoid misunderstandings and minimize the chances of defaulting on the repayment.
First, the business owner should determine whether the employees will be around during the repayment period. This is not recommended for businesses with seasonal, part-time, or as-needed employees who are not expected to work between January and May.
Second, the owner should give employees a choice about whether they want the withholdings deferred. If the employees do, they must be made aware that the deferred amount has to be paid back and how it will be paid back. The cumulative deferred amount should be noted on employees’ paychecks every pay period so they know how much they will have to pay back.
Lastly, since most payroll providers are not participating in the plan, CEOs or their accountants must know how to make the modifications themselves. Most payroll providers have online guidance on adjusting withholding numbers. For example, here is guidance for modifying tax withholdings on Quickbooks.
Based on the experience of one small business, it seems like small business owners should not have too much trouble implementing Trump’s deferral and repayment order on their own. Some might like getting an interest-free loan and won’t mind paying it back over a four-month period. And who knows, there might be a forgiveness provision coming in the near future.
Steven Chung is a tax attorney in Los Angeles, California. He helps people with basic tax planning and resolve tax disputes. He is also sympathetic to people with large student loans. He can be reached via email at sachimalbe@excite.com. Or you can connect with him on Twitter (@stevenchung) and connect with him on LinkedIn.