As a follow up to IRS expert Dan Pilla's segment last week on the radio show (LINK), the IRS cleared up a few things concerning the payroll tax holiday. President Trump signed an executive order on August 8, allowing employers to defer the employees' portion of the payroll tax from September 1 through the end of the year.
The guidance from the IRS was not crystal clear. It was clear that the payroll taxes deferred between September 1 and December 31 were due to be paid back to the IRS by April 15, 2022. It was clear that Employers had to make arrangements to pay the money back on behalf of the employee. It was implied that the employer was on the hook for the employee payroll tax deferment if the employee didn't pay the employer back.
The IRS's new guidance is not clear on the steps the employer can or will have to take to collect the money and get the IRS paid back.
I would do a pros and cons exercise - however, there are no pros and only cons. How about some observation and guidance.
1 - The payroll deferral savings for the employee will not be such that you get this massive benefit to your cash flow. It is a short-term no interest rate loan that has to be paid back within 5 to 9 months. If you need cash flow that bad because of the pandemic's effects, then there is less likely a chance that you will be able to pay it back when due.
2 - There is absolutely no upside for employers - they have to make payment arrangements with the employee, and it appears that they are on the hook if the employee does not pay back the money.
3 - If not paid back by April 15, 2021, penalties and interest would occur. Those penalties and interest significantly increase the balance owed in a short amount of time.
4 - What about an employee who quits? How is the employer going to get the money to pay back the government?
5 - Don't do this because President Trump said the deferred payroll taxes would be forgiven if re-elected. There are a lot of steps that need to occur before that would happen.
6 - It is still unclear if the employee has any say in the decision. If it were 100% up to the employer, I would say don't even think about it. The liability and hassle factor are not worth it. You are not doing your employees any favors. In fact, you are setting them up to potentially fail.
7 - Employees, if your employer thinks it is a good idea and payroll taxes are deferred, then withhold them yourself and put in a savings account.
Remember, this is not a tax cut or a tax break. It is a short-term loan with hefty penalties if not paid back.