The federal government has created several initiatives designed to mitigate the effects of the novel coronavirus on employers and employees. Your state may also have its own new benefit programs and requirements.
The CARES Act offers two payroll-related benefits to employers:
The Employee Retention Credit grants employers affected by the virus a 50% credit on wages earned in 2020 and paid after March 12, 2020. It allows employers to take their credit as a reduced remittance for payroll taxes. These amounts are reported on Form 941, line 11b.
The Payroll Tax Deferral program allows employers to defer remittance of the employer portion of their Social Security withholding until 12/31/2020, and repay it in increments over a two year period, from January 1, 2021 through December 31, 2022. Amounts deferred are reported on the 941 form, line 13b.
The Families First Coronavirus Response Act exempts employers from paying the employer portion of the Social Security tax on Family and Sick Leave wages. These are reported on the 941 separately from the standard social security wages, on lines 5a(i) and 5a(ii).
This act also grants employers a credit for qualified health care costs associated with the FFCRA and ERC wages. These amounts are computed on Worksheet 1 and reported in section 3 of the 941.
Deferral of Employee Social Security withholding
The president issued an executive order in August 2020 that allowed employees to defer withholding of the 6.2% Social Security (FICA) from their paychecks until 2021. The contributions are being postponed, not forgiven, and will have to be paid back over a period of four months, via excess withholding starting on January 1, 2021.
The order lacked critical details, which delayed issuance of IRS guidance until Friday, August 28 - one business day before the program was to go into effect. The guidance that was issued is brief, and still lacks detail in several areas.
Private sector employers are allowed, but not required, to offer this deferment to their employees. And it’s unclear whether those who do choose to offer it can allow individual employees to opt out. Early indications have not shown much enthusiasm for the program among most employers. Other questions remain as well:
What if an employee leaves the company before the deferred contributions are repaid?
The IRS has said that the employer is still liable for the funds, but offers no mechanism or authority for employers to recover the deferred amount from the employee.
Will the repayment obligation be forgiven?
The administration has indicated that it would support forgiveness, but to do so would require Congressional action, so the jury is still out. Both Republicans and Democrats have opposed this initiative, mostly due to the detrimental effect it would have on the Social Security system’s finances, which are already in need of attention. By all indications, it would be a mistake to assume that these amounts will be forgiven.
Our professional opinion
Essentially, what this program amounts to is a very short term loan to people who are currently employed. It does nothing for those who have lost their jobs, and it’s perversely ineffective in that the size of the “loan” increases as one’s income increases and (presumably) their needs decrease. It puts both employees and employers at risk if employment is terminated or compensation is reduced during the payback period. And it will undoubtedly mislead some employees who do not realize, or are not informed, that it must be repaid.
Based on these and other considerations, we recommend that employers do not implement this program. Financially, it’s a wash for the employee, it adds cost and complexity to payroll operations, and at the end of the day it’s basically an exercise in politics at the expense of hard working Americans who have enough to deal with in these extraordinary times. Employers who wish to can offer their employees the same level of financial help by simply loaning them money on mutually acceptable terms.
Effect on Payroll Tax Subscription
Deferment can be accomplished by setting the withholding rate for SSEC to zero during the deferment period. If there’s a demand, we will be developing a report that lists and totals eligible wage amounts per pay period, once definitive guidance is issued. This will allow employers to determine the amount of withholding to defer.
No changes to the 941 form are planned yet, it’s been revised three times already this year, and more changes are likely to come. We will issue additional guidance and information as the situation develops.