Payroll Tax Deferral Executive Order Explained for Employers

Welcome everyone, and thank you to those of you joining us live and those of you watching the recording after the fact. Today is August 13th, 2020, which is important to note because this is a dynamic situation we will be speaking about, and it's important to know that some of these things that we're talking about today will change, and we expect further guidance coming in the future. If you're looking for those updates, please visit our website ergpayroll.com. You can subscribe to our list by completing any of the forms on the site and gathering any of the awesome free resources we already have out there for you. And also make sure you subscribe to our YouTube channel for all the recordings and videos from this and prior and future issues related to human resources and payroll. So today we're going to continue our conversation about one of the most unique topics we have seen as employers in quite some time, and that's the impact of these economic programs put in place to to help employers. Uh, most appropriately today, we're going to be walking through the recent executive order by the president of the United States to defer payroll taxes for employees, specifically the employee portion of Social Security. My name is Matt Beatty. I'm the CEO of ERG Payroll and HR headquartered in Columbia, South Carolina, and I appreciate all of you joining us. So I got the ultimate compliment after one of our webinars recently, and that was that somebody attended the webinar and didn't even end up multitasking nearly as much as they thought they would. So I think that's about the highest bar I can achieve here. So I'm hopeful that your multitasking is minimal. And the good news is that this will probably be shorter than some of our other webinars from the perspective that the explanation is rather simple with what we know thus far, and we have some questions remaining which we'll talk through here throughout the process as well. Don't forget, once again, when you log on to our website, you'll have all resources for all things COVID-19 right on the home page. You can grab tons of free free templates, guides, and resources for your business right there. I'm not going to get into a lot about me. You can find me pretty easily. My name, when you Google it, I'll pop right up. There's not too many Matt Vadis in the world. And you can also connect with me on LinkedIn. Make sure that we share a lot of HR information on LinkedIn, or you can email me any questions after the fact. We tend to not do too much live Q&A during these sessions because of just the nature of the conversation. So if you could just drop me a note and I'll be happy to respond with an answer if we have the answer yet. And yeah, I look forward to connecting with all of you. Appreciate the time. So what we're going to walk through today is we're going to talk about the— of the 4 executive orders that were signed this weekend by the president, we're going to talk specifically about the payroll tax deferral executive order. We're going to talk about what's included in that EO and what we know about that, and then what we're waiting for and what's next. As you'll start to see when we get into this, the timing is going to be rather precarious in that we only have a couple of weeks as usual to prepare for this, and we have a lot of questions remaining. So once again, as I was talking with one of my friends yesterday, this has become the new normal. So there's nothing new here in that we're getting some legislation or an executive order passed, and then we've got to figure out the details later. All right. So what are we dealing with here? So on August 8th, the president signed an executive order And the title of that was— I would never put a title on one of my slides this long, except for it is the exact title of the executive order— the Memorandum on Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster. So the first thing that jumped out at me as I started reading through this was the emergency declaration date. It started on March 13th. Kind of wild to think about right now. It's exactly 5 months ago to the day. And the emergency declaration actually does have some further importance when we look at how this got— or how this actually operates on the mechanical side. So that jumped out for a couple of different reasons. One thing to note, and we'll talk about this in more detail in just a moment, is the language tells us that he's actually directing the Secretary to move forward with this. So there's some key language in here about how the President is directing the Secretary of Treasury In Section 2, he is saying that by the executive order, he's directing the Secretary of the Treasury, Steven Mnuchin, via U.S. Code 7508, which allows the president to postpone certain deadlines via the secretary for up to 1 year during an emergency period. So we'll dig into that a little bit more here in just a moment. What the other piece of this is and where we were all a little confused when this first came out, was that they didn't come right out and tell us what payroll taxes were deferred. We had to go to U.S. Code 3101, which defines that you're going to be allowed to defer the tax equal to 6.2%, which is the Social Security portion, not all of FICA. So not the 1.45%, just the 6.2% for employees. So once again, we'll dive into that in a little bit more detail in just a moment. And so Once again, I'm going to say it multiple times throughout the conversation. This is the employee portion of the Social Security tax. So under the CARES Act, employers can already elect to defer the deposit and payment of the employer portion of Social Security. That applies, uh, going in throughout the end of this year, uh, up until December 31st, went into place on March, and then half of that's going to be due on December 31st, 2021. And the other half is going to be due December 31st, 2022. And we've got some other great webinars walking through that if you go to the YouTube channel that are more specific to the CARES Act related relief and how that applies. And I will say once again, the thing that's going to be the underlying theme to all of this is anytime you defer something, you are creating a whole lot more work in the long run of managing this. And so you have to really look at that return on your investment when you start to think about it of, is this worth it for me to defer this payment? Um, and it's also important to note that term defer because it sets a precedent for the tax, whether or not it should be forgiven as outlined in, uh, 1401. But let's move into a little bit more detail here. So let's talk about it at a high level. So the 2020 employee payroll tax deferral, who's actually eligible for this? Well, most of your employees are going to be eligible. Anybody who makes less than $104,000 per year So in the executive order, that is defined as $4,000 in gross pay per pay period for a biweekly employee. So that's 26 pay periods times $4,000 equals $140,000— $104,000 per year. So what are they being deferred? Like we just talked about, they can defer the employee portion of Social Security. And in the, in the language we're going to talk about in just a moment, it alludes to that being an employee decision. However, we've seen some conflicting, uh, language come out since. So when is this going to affect— well, it's going into effect, of course, in a couple weeks and gonna end at the end of 2020. So these are 2020 dates, September 1st, 2020 through 12/31/2020. So let's talk about what the mechanics that look like. The 2020 employee payroll tax deferral is for the Social Security, and these are things to note about what your employee taxes are in general. So you've got Social Security, you've got Medicare, you've got federal income tax. Social Security, uh, obviously filling the bucket for the Social Security fund. So there's a 6.2% for both the employee and employer for a total of 12.4%. We already talked about the employer portion. There's already an opportunity to defer that. Now the employee is going to have the option to defer their employee portion and Medicare is not included in this, and federal income tax is not included in this. So important to know because you're going to have to start answering these questions from your employees. A lot of CPAs on the call as well, from your clients and from, you know, those individual clients and business clients, they're going to say, hey, I heard I can defer all my taxes. That's not the case. And it is just the 6.2%. So let's look at how that works out. And I say just the 6.2%. And, you know, one of the things to note here is I have no dog in this fight. I am here just to deliver information. I have no opinion. I am only here to provide guidance on what is happening and what our realities are, not what I think about them. So I say that because I think it's important to be sort of an unbiased advisor during times like this. And hopefully that can be more valuable to you as you use that unbiased lens when explaining this to your teammates, because that is probably our biggest responsibility as employers is not to invoke our personal opinions upon things that are matters of fact, if you will. So in this case, we were looking at it from— I want to give a quick calculation here on the average household income and what that tax deferral would look like. So the median 2018 household income was a little over $63,000. I put it at $64,000 according to the US Census Bureau of Statistics. So if you suppose a hypothetical taxpayer made $64,000, and then you slice that into 26 paychecks paid on a biweekly basis, that comes out to roughly $2,461 per paycheck pre-tax. The 6.2% Social Security tax on that paycheck would be about $152. So with 2 paychecks paid each month through September, through the end of the year, from September through the end of the year, that would give them about $1,220. So once again, this is only accounting for the period remaining for the rest of the year, September to December 31st, and the average household income is going to see about a $1,220 reduction in tax. So I think that's important because obviously it's a— this hypothetical sum is around the size of a stimulus check. And one of the reasons why this is happening is because the stimulus, the second round of stimulus care, is deadlocked on the floor. And so the president took things into his own hands to try to take some short-term measures. Now, important also to note that this is a deferral that they are hoping to forgive. However, at this point it is purely a deferral and there is no guarantee that this will ever be forgiven, which is certainly something that's going to have to come into everybody's, um, decision-making process as we continue to move forward with this. And based on the language that we are seeing in further conversations coming out of this, I don't believe that there will be— believe you will have to engage in this prior to knowing whether or not it will be forgiven, which obviously creates a unique situation for everyone involved. All right. So let's talk about the fine print. So today I am direct— this is direct from the executive order. Today I am directing the Secretary of the Treasury to use his authority to defer certain payroll tax obligations with respect to the American workers most in need. So that's once again goes back to, is this a deferral or a tax cut? It's obviously a deferral, but he's directing the secretary to use his power from U.S. Code 7508. And if we look at U.S. Code, maybe not. Well, if we would have looked at U.S. Code 7508, I'm not sure why this image isn't pulling up here. I'll pull it up on my other screen so I can read it to you verbatim since I had it on there. It's going to advise us as far as what the Secretary of Treasury authority is in a circumstance like this. And so what it is is the authority to postpone certain deadlines by reason of presidentially declared disaster or terroristic or military actions. So in the case of a taxpayer determined by the Secretary to be affected by a federally declared disaster or a terroristic or military action, The Secretary may specify a period of up to 1 year that may be disregarded in determining under the Internal Revenue laws taxes related to it. It goes on to list several things. But so that's where this is coming from, is that we're— it's kind of a little bit of a backdoor way to get there, but that is how we're getting where we are. So what do we do from here, and what are some things to consider? We've got, uh, once again, I think if I'm to be quite candid, I, I had we had scheduled this on Monday with what we knew. We were hoping, as has been tradition when these things get thrown into our lap over the course of a weekend, that later on in the week we get a little bit further clarity from, you know, whatever agency we need it from, whether it be the IRS, Department of Labor, or whomever. We have not gotten much of that this week, so we're forced to read the tea leaves a little bit, and we're forced to also look at some of the things that have been said above and beyond by some of the key players after this, which I'm going to get into in just a moment. So we've got some things to consider as an employer. And the first one is that this is obvious— this is as defined in the, the, the executive order. This is optional, and it appears it's going to remain optional based on comments from Mnuchin. So the way that the order is written, it seems that employees would opt in for this tax deferral, and employers must honor their opt-in requests. So it's kind of interesting because it's, it's a little bit, uh, you're going to see some contradictory language coming out in interviews since then. But ultimately the thing to consider about, or the thing to think about here is that employers may ultimately be on the hook for paying back those taxes when due. So if I have 10 employees right now that all tell me they want to defer these taxes and come, you know, when they're due in December of 2021, which precedent tells us is a possibility of when these could possibly be due. Those employees are no longer with me, and as the employer, I'm on the hook for paying back their deferred taxes. How exactly am I going to go about that? How am I going to collect those taxes from those employees and submit them to the agency? So we're seeing a little bit of confliction as far as the employee option to opt in, but the employer having the burden. And so the burden of why it would be on the employer, it makes perfect sense when you think about it from the perspective of that it's removing the burden from the government of having to send a check to everyone and having to, you know, make sure, double-check all those addresses again, get up, make sure all the information is correct, all the administrative that goes into that. Instead, it's putting the burden on payroll and tax departments. And so, so kind of like it or not, that's where we're going with that. But, uh, but recent comments from, uh, Mnuchin make it sound as if employers will make a decision whether they will participate and not So he has said some things in a recent interview with Fox News that would make it sound as if it were optional for employers to participate in this. So he said specifically, employers will be reluctant to pass along the deferred taxes to their employees because they may have to figure out— I'm sorry, that was not from Mnuchin, that was from another party, but I've got Mnuchin's quote on the next slide. But there's also this concern about employers being reluctant to pass along the deferred taxes to their employees because they may have to figure out how to recoup those funds when they do make the deferral payment back. So if you defer it, when will you owe it back? Do you have to do all of your employees, or are you allowed to just do some of your employees, or is it an all or nothing situation? These are some of the big questions that we are still waiting for some clarity on. But, you know, from my perspective, I know one of the first things I thought about was what if an employee or a group of employees all elect to defer the payment and then the payment gets forgiven? What about those other employees that didn't? And so just because they opted not to, now are they not going to get the benefit of that tax rebate, if you will, on those monies? So some complex situations here that are going to come out of it. And there's really just no guidance at this point on whether or not this will be a deferral and how that deferral will be handled. Pardon me. So one of the things— I apologize, this was the quote from Mnuchin that I referenced earlier. In a recent interview with Fox News, he said, we're going to create a level of certainty for employers that want to participate. And so that wording has us kind of, you know, our ears perked up as far as where the decision will actually lie, because that's, well, as mentioned, slightly contradictory to the executive order that it's an opt-in for the employees. Uh, but we, uh, White House economic advisor Larry Kudlow also says that we will take any steps possible to forgive this deferral. So employees will not be required to pay back the amounts deferred through December 31st. However, doing so would require new, new legislation by Congress. So a lot to unpack here. Still a lot that we don't know, but when we look at the structure, we've got a good feel for what it is. Um, we just have to get into some of the mechanics of that at this point. So I would say at this point, once again, I, I was hopeful in the respect that I would be able to have a little bit more information, but glad in the respect that I can give you part of your day back. Uh, you've got some very simple action items in the short term, and that is to prepare by continuing to gather information, discuss with your payroll administrator steps to adjust their payroll, uh, to exclude the employee's share of FICA Social Security taxes beginning September 1st. If you are an ERG client, you're on this call, we already have the button set up in the system ready to go to turn off the Social Security portion. We just need a little bit more guidance on how exactly we're going to— is that going to be an employer-wide decision? Is it going to be an employee-level decision? And that we will communicate directly with you on how we want to gather that information from you, whether it be directly in the system or whether it be via direct communication with you. So stay tuned for more on that. You will obviously have some decisions to make as an employer on how you want to handle the notification of employees and how you want to communicate to employees. We will continue to have more webinars like this where we're going to provide information as it continues to come out. And I would expect questions from your employees are going to be confused about current future paycheck adjustments. So thankfully we've got this initial bit of information in hand to start to answer their questions. Um, and then we also are looking forward to helping folks to execute this as you move forward. And so once again, if you're, if you're working inside of a— or if you are working with ERG, we're going to make that as simple as possible for you with some proactive outreach to make sure that you understand exactly what this means for you and your employees. If you're working with another payroll provider or system, make sure that you reach out to them directly so that you can get the information as soon as we get further clarity. So hopefully that was a good definition of what we do know so far. We know that there is a payroll tax deferral for the employee portion of Social Security, and that will be executed here over the next coming weeks. We look for further guidance to help you continue to find out the best way to, uh, prepare, decide, and execute for your team. And all of you that are on this webinar that went ahead and entered your information, you're going to get email follow-ups with all the information as it continues to come out. So no need to take any action. If you're watching the video after the fact, I highly suggest making sure you subscribe so we can push the information out to you directly. And once again, as always, we're incredibly grateful that you would trust us to share some of this information with you. We are ERG Payroll and HR. We are out of Columbia, South Carolina. We are payroll with a purpose. We give away 5% of our business to nonprofits, and we try to do our best to give away everything we can, including valuable information like this to the market. And if you need help with payroll and HR, human resources expertise or software, please keep us in mind. And that was record time. The Yankee came out in me. I talked fast. We cruised through it, but I really just didn't want to fill it up with any fluff. So hopefully that was valuable for you on what we had information relating to, and we'll continue to push out more information as it's available. Thank you so much, everybody, for your time today, and I look forward to speaking to y'all soon.