This weekend the President issued an Executive Order to postpone employer’s payment of wage taxes. The advice that I and every other small business tax adviser, to my knowledge, immediately issued to clients was to take no action until we receive further guidance. Most tax experts believe that only Congress has the power to stop the collection of taxes. But the president may have the right to postpone the payment of taxes. The employer still has the obligation to collect and pay the taxes. The Executive Order acknowledges this snag: “The Secretary of the Treasury shall explore avenues, including legislation, to eliminate the obligation to pay the taxes deferred pursuant to the implementation of this memorandum”. At this point it seems unlikely that such an outcome of permanently dismissing the payment tax is possible. Employers must likely still collect and pay the tax. The Executive Order only addresses the timing of the requirement to collect and pay.
This immediately raised questions about how employers should process their payroll beginning this week. For most small business employers in my client list, the obligation to collect taxes from employees occurs on each payday and the obligation to pay those taxes to the government occurs every three months. The small business employer’s requirements are explained by IRS here. Failure to collect and pay the tax is considered the most egregious type of tax non-compliance and enforcement action often results in the termination of the business and financial ruin for the small business owners. The next ordinary quarterly wage tax payment would be in October. The executive order appears to postpone that quarterly payment, along with the next quarterly payment, until January 2021.
My advice is this:
1) If you use a professional payroll service, follow their guidance and policy. You probably do not need to take any manual action.
2) If you need to make a decision on your own right now without any further guidance from the government, make no change in payroll processing procedures at this time.
3) If your bookkeeper or employees need further clarification and references, please schedule a call as soon as possible.
I see three possible immediate risks or potential areas of tension:
- Some employees influenced by non-professional sources of information may believe their right to receive an increase in net pay now. We have a serious societal risk with misinformation.
- Some employers may react differently than the advice given here. In that case, the different response may trigger a larger discussion or uncertainty.
- Some may consider the professional advice as disrespectful to the President.
- In each of these cases, if it occurs, the best approach is clearly worded professional discussion. In the event of conflict or questions employers should not get involved in direct discussion of the issues with employees.