It has either eliminated or disrupted everyone’s job. There have been several responses from Congress and the Treasury Department to attempt to ease – as much as is possible – filing obligations of taxpayers.
Relieving burdens is hard to debate. But the manner in which several of these relief provisions has occurred is troubling.
Last year, 155 million individual tax returns were filed. Actions that may affect so many filers need to be taken with care and Treasury guidance needs to be timely and precise.
Earlier this year I wrote that the first notice that the filing date for individual tax returns would be delayed until July 15 was by a tweet. As would be expected, this led to some uncertainty.
On Aug. 8, the president issued an executive order that gave the Treasury Department the authority to delay the due date for employers to withhold and remit the employee’s share of payroll taxes. It was clear that this would be a delay and not elimination of the obligation.
In IRS Notice 2020-65 the details of this order were fleshed out.
Well, sort of.
First, the notice begins by classifying employers as “affected taxpayers” as a result of COVID-19. Being affected allows optional relief from the withholding obligation for the period Sept. 1, 2020, to Dec. 31, 2020.
Any employee payroll tax not collected during the covered period would be collected from the four-month period beginning Jan. 1, 2021, and ending April 30, 2021. So the employee’s share would be doubled up in the first four months of 2021.
A few oddities. First, being an affected employer would seem to mean there was some difficulty in collecting and remitting the tax. The tax deferred does not increase the employer’s cash flow – so being affected does not logically tie to cash flow issues.
The deferred tax does increase the employee’s cash flow for the last four months of 2020. That seems to affect the employee, but it is not the employee who is said to be affected.
The deferral applies only to the Old Age and Survivor Disability Insurance portion – 6.2% – of the payroll tax. The employer still must collect and remit the Medicare tax – 1.45%. And the employer’s 7.65% share is not deferred.
The deferral also applies only to a specific employee’s wages below $4,000 for a bi-weekly pay period. An employer with some employees below and some above the threshold would be required to collect OASDI tax from some employees.
So the employee who gets a short-term deferral benefit is not affected and the so-called affected employer is affected only for the collection of one type of tax and perhaps only for some employees.
I am then confused as to what it is that is affecting this employer that justifies the deferral of the employee’s OASDI tax. But to move on, let’s say it is some administrative burden exacerbated by COVID-19 and that this order will take a load off for that employer.
Beginning in 2021, this relieved employer will be forced to withhold “regular” employee OASDI tax and a catch up for the deferred OASDI tax from the last four months of 2020. This continues through April 30, 2021.
I don’t mean to be a Nervous Nellie here but it seems that the COVID-affected employer might find themselves more burdened by the deferral and catch up provisions. If they are otherwise collecting Medicare, and paying their share of OASDI and Medicare, isn’t it more relaxing to just keep collecting the employee’s share also?
Health care and dependent care flexible spending accounts (FSAs) have a “uniform coverage” requirement that forces an employer to reimburse the full amount of an employee’s annual FSA allocation even if expenses are incurred early in the year before all employee contributions have been made.
Uniform coverage can saddle the employer with a burden if employees quit before making all deposits to the FSA. The OASDI deferral may carry similar risk if the employee is no longer around through 4-30-2021. People disagree about what happens if this occurs.
A final oddity. IRS Notices list an author at the end – you can call this person with questions. Notice 2020-65 is unusual because the author is “attorneys” with the relevant divisions. No pride of authorship. Hmmm.
James R. Hamill is the Director of Tax Practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at email@example.com.