Employers that opt to give employees a pandemic-related Social Security payroll tax holiday to boost wages for the remainder of the year will be taking on a complicated administrative task, Pete Isberg, vice president of government affairs at payroll giant ADP, said this week in an Accounting Today podcast.

President Donald Trump signed an executive order Aug. 8 to create the tax deferral, after Congress failed to extend enhanced unemployment benefits or take other measures to stimulate the economy.

Employers participating in the program must give employees the option of keeping the 6.2% tax that is normally withheld each pay period. By keeping the money, employees get bigger paychecks. But it is just temporary — they'll have to pay the money back, unless Congress passes legislation turning the deferral into a tax cut.

The benefit applies to employees earning up to $4,000 a pay period and covers paychecks issued between Sept. 1 and Dec. 31. The deferred amounts have to be paid back through additional employee paycheck withholdings between Jan. 1 and the end of April next year.

Complex administration

The program's implementation burden falls on employers. Those that decide to participate must let employees know about the deferral and the added burden they'll face to pay the money back next year. Guidance the IRS issued Aug. 28 says the increased withholdings are to be applied in equals amounts between Jan. 1 and April 30.

For employees who leave between Sept. 1 and the end of the year, employers could remit to the IRS the deferred taxes all at once by combining all extra withholdings into employees' last paycheck. That would significantly cut into employees' take-home pay for that last period, a particular risk for seasonal employees.

"Say there are eight payroll checks where the Social Security tax is deferred," Isberg said. "On that ninth check, the employer is going to take the opportunity to collect the entire amount of the deferral and that would take up literally one half of the paycheck. So, that's going to be a surprise to some people."

Employers who don't collect the deferred taxes could face the liability of repaying the taxes themselves. "The employer is literally on the hook," he said. "The IRS will absolutely collect from you."

Employee choice

The administrative burden for employers will be especially hard, if some employees want to take the deferral and others don't.

"You have to give employees some explanation of what this is, what their options are," he said. "And you have to give those employees a way to come back to you and say, 'yes' or 'no.' And you have to provide for people who might change their mind."

Isberg anticipates most employers will decide not to participate. Not only is the administrative burden heavy for a short-term change, but most employees, once they understand the pay decrease they face upon repayment, likely won't want to participate.

"Some of them [will] say, ‘Well, we really don't want to do this. So, if you don't mind, please excuse me,'" he said. "‘I would rather just have you continue withholding as normal.'"

Tax treatment

The IRS has yet to provide guidance on how to treat the deferral on employees' W-2 form.

On the employee tax reporting side, employers can expect changes to Form 941, which Isberg said is expected to have additional lines to report amounts deferred separately.

Corresponding changes to the W-2 remain unclear. "There's a box 3, a box 4, tax withheld," he said. "The question is, 'Should I report on that box 4, Social Security tax withheld ... or should I ignore the deferral and just report the liability?' That's a big question [with] a lot of implications."

Repayment waiver

Whether Congress will pass legislation to waive employees' repayment liability is uncertain. But many lawmakers, in both parties, have cast doubt on the idea. It could drain money from the country's retirement programs, which are already considered badly underfunded.

The Trump administration has said it will require 1.3 million federal workers to take the deferral, prompting a backlash among some industry groups and lawmakers who say it turns these employees into guinea pigs for a program whose benefits are questionable.

"Workers will have to pay double their regular payroll tax rate during the first four months of 2021, and if they cannot do so, they will have to pay interest and penalties on amounts still owed if they're not paid back by May 1, 2021," Everett Kelley, president of American Federation of Government Employees, said.