Folks, there’s a reason that neither party in Congress supported putting the holiday into a relief bill. It’s confusing, ineffective and potentially disastrous for workers — and maybe the IRS.
For those of you who are still fuzzy on the details of this “holiday”:
Trump’s executive order said that companies can stop withholding the 6.2% that employees — at least ones making less than $4,000 per biweekly check — pay toward Social Security from September through December.
It’s estimated that the average worker would get an extra $2,200 total. Trump thinks that with more money, people will spend more and thus stimulate the economy.
Three problems for Americans
Well, first of all, this does nothing for the people who need it most: the unemployed. You don’t pay FICA taxes on unemployment, so people without jobs won’t see a dime more. (Yes, he did also do an executive order for an unemployment bonus, but don’t even get me started with the issues with that one.)
Second — and the main catch — is that this is a holiday. It’s a deferral, not a permanent reprieve. Unless Congress agrees to make the holiday a permanent cut (at least for that time period), employers would have to take an extra 6.2% out of employee paychecks from January through April 2021.
That means that people — especially ones without much/anything in savings — shouldn’t be spending the extra money. They should put it in a savings account to cover any shortfalls that would come with lower checks January through April 2021.
So if people are being smart, not much of that extra money is likely to make it into the economy. In other words, it won’t have a hoped-for stimulus effect.
Third, as Military Dollar pointed out on Twitter, there’s another issue for workers: raises in the new year.
If employers are taking out an extra 6.2% from January through April, that will be based on employees’ 2021 salaries. So if they receive a raise for 2021, they’ll actually end up paying more in FICA taxes than they would’ve if payroll withholding had been normal in 2020.
The main problems for companies
This is a huge problem for employers on multiple fronts.
First of all, most companies use software to calculate and generate checks. And that tax software is programmed to automatically deduct FICA taxes. Who knows if there’s even a way to get the tax software to stop taking out that 6.2%?
Even if there is, let’s not forget that the cut is only for employees making less than $4,000 per biweekly check. So employers have to figure out how to get the software to keep the 6.2% for some employees’ checks but not others’.
This confusing situation may require extra time for companies to implement, which means the holiday may not begin on time for some workers. Making the math even more complex for employers.
Even once companies surmount that whole issue, there’s the fact that companies are worried about being on the hook for larger payments next year. If they don’t recoup and pay the extra funds by April 30th, they face interest and penalties.
And sure, that’s easy enough to do (probably) for employees working through April 2021. But what about ones who quit or are fired at any point after getting their first September check?
Will the company be on the hook for the money and then have to pursue the ex-employee for the funds? Or will the IRS hold the worker responsible and penalize them if they don’t know to account for the extra tax owed on their personal return?
And if the IRS does hold the worker solely responsible, how does the company indicate on its tax forms that some wages are subject to back Social Security taxes, but that it isn’t responsible for collecting them and that the individual’s tax burden should be increased in the IRS’s records?
The tax filing problem
The final issue for companies is also a huge one for the IRS: the 941 form (which is what companies file for their FICA tax withholding) wasn’t updated to account for the executive order.
There is still only the one line to write in the Social Security wages, and that line has you multiply the wages paid by 12.4%. (There are lines for qualified sick leave and qualified family leave that have a 6.2% tax rate, but I don’t know how much the IRS would like companies misusing those lines.) But the third quarter includes September, where companies aren’t supposed to be taking out 6.2% of that.
So if it follows the executive order, a company’s 941 forms will have a higher number than what the company actually pays. (Yes, companies can pay online to skip the forms issue, but with a processing fee of around 1.5-2%, that’s a big charge for companies with more than a few well-paid employees.)
The discrepancy means that the IRS is presumably going to have to follow up with companies to verify that the issue is due to the executive order and not an accounting error or other problem.
Now, maybe the form will be adjusted for the fourth quarter. (Maybe. I don’t have a lot of faith in the speed at which the IRS implements changes.) But at the very least, it’s going to be a big problem for companies — and the IRS — in the third quarter of 2020.
All in all, the tax holiday a huge hassle for employers. So it’s not surprising that a lot of companies have decided to ignore the executive order altogether.
In other cases, employees are being given the option to opt out (which will make companies’ math/software headache even worse, but it’s nice of them to offer).
And that’s fine if the the holiday does remain a temporary deferral, but…
Yet another huge headache
What happens if the holiday becomes a permanent tax cut? How do people who paid Social Security tax from September through December 2020 get their money back?
Well, given that there has (to my knowledge) never been a tax holiday before, there’s no definitive answer.
Presumably, it will come down to one of two methods.
My initial assumption was that companies would have to file an amended 941 form to get a refund of the overpaid Social Security taxes. They would then disburse the refunded amounts to the employees who paid.
But an article I read suggested it would be a different method: individuals would have to go after the taxes on their own.
The article said that workers should add the extra Social Security taxes to their “taxes paid” line on their 1040 forms. Thus, they’d get the money back either as a refund or as a decrease in any payment owed.
Okay, to be clear, I’m not a tax expert by any stretch of the imagination, but I can think of a lot of potential problems with this approach.
First of all, people would have to know to add that in. Obviously, any tax preparer will ask, and presumably tax software will add in a question for this issue. But if they have a simple return and just do it on their own, will they know to take this step?
Second, they’d need to know how much they overpaid. If they were on an unchanged salary, that’s simple enough: divide the salary by three (four out of 12 months) and multiply that amount by 6.2%.
But if they got a bump in salary mid-year or work hourly (especially if the hours vary or they do overtime), they’ll have to their company’s accounting department for that information. Presumably, the volume of requests for that information is going to make it slow to get.
Then there’s the issue of the source of the money.
In this scenario, the IRS would be paying out/crediting taxpayers for money that went to the Social Security Administration, not to the IRS’s general fund. That’s obviously problematic.
But hey, the IRS can just request the money from the SSA, right? Well…
If there’s no separate line for Social Security taxes overpaid, the IRS wouldn’t know how much to request from Social Security.
Now, the IRS already looks at your total tax payments for the year and compares it to the amount on your “taxes paid” line. No change there. But if there’s a difference between those two amounts, the IRS wouldn’t know if you got the amount wrong or whether this included Socail Security taxes.
So the only thing I can think is that every time an individual’s return had this kind of discrepancy, the IRS would have to check with Social Security to verify that the difference was indeed paid as Social Security tax. Then request that the SSA pay the IRS the difference.
This would almost certainly mean processing time was substantially longer for anyone who overpaid Social Security tax — and maybe just for returns in general. So refunds would almost certainly be substantially delayed.
Maybe there’s a more simple solution that I’m not seeing. But it just seems complicated no matter how you slice it.
Will the holiday become permanent?
Of course, all that is only a problem if the holiday is made into a permanent cut (for that period of time).
Trump has promised to try to push Congress to forgive the holiday’s accrued taxes if re-elected. And I’m guessing Biden would feel pressure not to hurt the average American with double Social Security tax, so he’d probably pressure Congress to make the holiday permanent.
But neither man can make Congress do it.
Meanwhile, Congress would have to find the money to cover the contributions. Mnuchin said the Treasury would cover it, but a lot of conservatives won’t want the government footing that bill, adding to our debt. So they might vote against tax forgiveness on that principle alone.
Of course, depending on how November elections go, Republicans might be in the minority and unable to stop a bill. But I’m sure there would be Democrats similarly concerned about the question of funding.
So it’s pretty much impossible to say how likely it is that these four months’ Social Security taxes will be forgiven.
What the hell am I going to do?
As some of you know, I’m a contract worker for my employer, so I created an S-Corp to help me save on self-employment tax. I’m a W-2 employee (the sole one, actually) for that corporation.
I have to file this quarter’s 941 form by the end of this month, so I have to know what I’m doing by then. But even sooner — around the 12th — I’ll need to write out a check for my employee salary, so I need to decide whether I’m withholding Social Security tax very soon.
As it stands now, I’ve pretty much decided not to defer my “employee’s” Social Security tax. I’m just going to keep taking it out. I don’t want to deal with the math or the changes I’d have to make to the W-2, which right now I can just copy each year based on the previous one’s.
But I still have to decide what to do with those withheld funds.
I could just keep them in my business account. If the holiday proves to be temporary, I have the funds ready for my first 941 filing in 2021. If it becomes a permanent cut, I can just write my “employee” an extra check for the difference. (Which would also mess up my W-2, but oh well.)
Or I can choose to pay at the normal rate and, if the holiday is made into a tax cut, just investigate how to retrieve the funds in 2021.
I’m pretty sure that I’m going for the latter. The deciding factor is that the 941 form wasn’t changed, and I don’t want to argue with the IRS about my payment amount not matching the amount on the form.
Yes, I could file online — which skips my needing to file a form — but I still don’t know that I want the headache in the new year of refiguring how much I should be paying.
Also, if I do have to make an extra large payment in the first quarter of 2021, that would put me over the amount qualifying me as needing to become a monthly depositor (rather than paying quarterly). It would be a one-time thing, but I’m not sure if the IRS would see it that way.
So for now, I’m taking the path of least resistance.
What do you guys think about this tax holiday? Are you participating?