Question: In Mid-August 2020, President Trump signed a series of Executive Orders related to COVID-19 relief. One of the orders made provisions for the deferment of the payment of Social Security and Medicare Taxes as of Sept 1, 2020. How is this handled in MIP?
NOTE: This is a developing issue and subject to change
When this executive order was made, there was no official guidance from the IRS. On 8/28, there was additional information released. However, it was not complete, clear, or conclusive and did not give specific enough requirements to know if you are in compliance. It also placed the liability for collecting deferred taxes on the employer in 2021.
While not entirely clear, it appears that this is an optional program that employers may opt into. Despite the intent of the program to aid employees with financial issues, what little guidance that was provided only mentioned a choice of the employer to opt-in or out of the program and didn’t make it clear if it was an all or nothing choice for the employer (all employees or none, not the ability to choose employee by employee). It appears that it is the EMPLOYER, not the employee, who can make the decision to participate or not. You should consult your tax advisor for recommendations.
The basic provisions of the order are that the employee portion of Social Security Tax is deferred between September 1, 2020, to December 31, 2020. These taxes would not be withheld from the payroll checks. However, these amounts are still owed to the government and will need to be paid back.
These amounts are to be paid back between January 1, 2021, and April 30, 2021. Even though the notice provides for a ratable increase in 2021 withholding to be used as the primary method for recouping the differed taxes, it is important to note that the EMPLOYER, not the employee is liable to pay all differed taxes by the May 1, 2021 deadline. Failure to do so will result in penalties, interest, and added taxes
Employers who participate in the program are assuming a liability for any taxes that they do not withhold from the employee as part of the deferral, even if they are unable to collect from the employee.
If employer is unable to pay the taxes owed it is unclear how the taxes will be collected from the individual who owes them.
At this time (8/31/2020), MIP will not be making any program changes to accommodate this optional program. The primary factor contributing to this decision is that customer polling has indicated that the vast majority of our users have chosen not to participate.
For customers that choose to take advantage of the program, it will be an entirely manual process.
These are the best recommendations:
Make sure that the employees are aware that this is not a tax break but a tax deferral. Any taxes not collected during this period are owed next year and must be paid by April 30.
It is recommended that employers draft and have the employee sign a contract understanding and agreeing to pay the employer back. The amount differed, preferably by May 1, 2021, and specify the methods for making the payments. Consideration needs to be taken if the employee is no longer with the company or refuses to pay. The employer will still be liable for the amount.
Work out an agreed-on repayment schedule with the employee. Merely doubling the SS Tax withheld at the beginning of 2021 is unlikely to get accurate numbers. This is because some employees may work different numbers of hours or at different pay rates between September 1, 2020, and April 30, 2021. Be sure to consider what happens if the employee is no longer with the company and is unwilling or unable to pay the taxes owed.
MIP has limited functionality for adjusting the way Social Security Taxes are calculated. This is done under Maintain>Payroll>Federal Taxes and the Employee FICA taxes Tab.
The only change we recommend making is changing the calculation method from Y to C. Under the Y calculation method, the system will look at the YTD amount of SS Subject Earnings and Tax and attempt to correct it on the next check. This will result in the system attempting to “correct’ all the withholding that was not taken out each pay period. This will result in larger and larger amounts and may cause the check not to calculate if the withholding correction is larger than the net pay. The use of the C method will cause the system to withhold the standard 6.2% that can be adjusted each check.
NOTE: When you install a version update on the server or move your server installation, the system will automatically default your calculation method back to Y. If you do not manually fix this, the next payroll will likely have large amounts of SS tax taken out possibly causing the check to not calculate.
While it may be tempting to set the percentage of wages to 0% on the Employee FICA Taxes, this may cause additional issues. The deferral only applies to employees making less than a certain amount per pay period. If you have employees making more than that, the deferral does not apply to them. There is no way to apply this rate to specific employees selectively. Also note, if you apply an update or move the server location, the system will default the rate back to 6.2%.
Keep in mind that in the event that you make a mistake (usually an incorrect adjustment) to an employee who is not part of the program, the system will not automatically catch up and correct amounts under the “C” calculation method.
Once you have done the setup, the actual deferral process will have to be done on an employee by employee and pay period by pay period basis.
After you have calculated your payroll, you will need to go to Activities>Review/Modify Calculated Payroll. Go to the Taxes tab and look for Social Security Taxes only. Look for the EMPLOYEE amount and zero out the Employee Amount only.
Do NOT modify the subject earnings or any employer amount. After each change, you will get a popup warning message. Click OK.
Prior to zeroing out this amount, you should make a note of the amount and the employee that it belongs to as you may need this for your records and recording the liability later.
When you save this change, you will also get a question if you want to recalculate Taxes. Say NO, or it will undo the modification you just made.
This change does not modify or override the adjustments to Employer Taxes and earnings from COVID related sick and extended leave.
Recognizing the Liability-
Since this program is a Tax deferral rather than a Tax reduction, the employer is still liable to the government for the amount of Taxes deferred. As such, it is prudent (but not required) to record a liability of this tax that will be owed.
There is no way to have the payroll system automatically record these liability amounts. It must be done manually in accounting.
The best recommendation is to set up a new GL Liability and Accrual account. After you have done payroll, you should do a JV to record the amount of tax deferred into this account. It is recommended that you do a document for each employee to make tracking and reimbursement easier.
As of 9/21/2020, the IRS has released a new 941 draft template indicating that the Deferred Employee Social Security Wages will be reported in Box 13b and line 24.
Keep an eye out for the final draft.
Due to the optional nature of this program, lack of clear guidance on many important details and the potential liability that it can expose an employer to, we strongly encourage you consult with your tax advisor before opting into participation in this program.