Payroll Tax Deferral

With COVID-19 continuing to wreak havoc on businesses of all sizes and individuals nationwide, the U.S. government is searching for ways to provide additional relief to employers. In an effort to help alleviate the negative effects of the coronavirus, President Trump issued multiple executive orders on August 8, 2020. One, in particular, relates to a payroll tax deferral that allegedly provides temporary relief to employees. As a result, on September 1, 2020, the IRS issued guidance (Notice 2020-65) on the payroll tax deferral for wages paid.

What This Currently Means

Only FICA taxes (the 6.2% portion of the federal payroll tax on employees and its Railroad Retirement equivalent) are deferred. Medicare taxes are not deferred.

Then, too, this deferral applies to taxes on employees who earn less than $4,000 bi-weekly. If the payroll period doesn’t occur bi-weekly, then the limits are adjusted accordingly. It’s important to note that if an employee earns $4,010 dollars in a bi-weekly period, none of the FICA taxes are deferred. However, if an employee earns $3,990, the FICA taxes will be deferred. This is what’s called a “cliff effect” rule. AND, this determination is independently repeated for each pay period.

Then, in January 2021, the employer will collect and remit the deferred taxes by increasing withholdings on employee earnings. To confuse things more, if the employer chooses to withhold the FICA taxes, irrespective of the deferral, then the employer needs to remit the taxes following the standard rules currently in place.

In total, President Trump issued four executive orders, the first being the payroll tax deferral. The remaining three executive orders cover unemployment aid expansion, student loan payment deferral, and protection from evictions.

Of Importance to Employers

  • Currently, it appears that participation in the withholding tax deferral is optional and only defers the employee portion of payroll taxes.
  • FICA tax consists of an employee’s portion of their Social Security tax and Medicare taxes, with matching funds provided by the employer. For clarity, the employee portion of Social Security is 6.2% until the employee reaches a designated wage base. The balance of their FICA taxes is the employee’s Medicare tax, which is 1.45%, with a matching amount paid by the employer. However, the withholding deferral only covers an employee’s Social Security portion of their FICA taxes. And, according to President Trump’s executive order for the payroll tax deferral, this will only be in effect between September 1 and December 31, 2020.
  • If you, as an employer, offer this option to your employees, then you are responsible for remitting these taxes to the IRS on behalf of your employees without any penalties or interest no later than April 30, 2021. This means you will collect and pay the Social Security tax for September 1 through December 31, 2020, in addition to the collected Social Security tax from January 1, 2021 through April 30, 2021.
  • Employers have the option of making “other arrangements” to collect the deferred FICA taxes from employees; however, details related to “making other arrangements” have not been clearly defined to date.
  • If an employee chooses to defer his FICA taxes and leaves the company before the deferred taxes are paid, the employer is still responsible for covering those taxes, irrespective of his ability to collect them from the employee.
  • Also, for employers with workers who receive tips, it is not clear how the obligation to collect and deposit the deferred taxes will coordinate with the rules governing the withholding of taxes on tips.
  • A self-employed taxpayer doesn’t have the option of taking advantage of this tax deferral break.

What Remains Ambiguous

This employee payroll tax deferral mimics a tax cut, because workers would be temporarily taking home larger paychecks during this timeframe. However, because this is a deferral and not an exemption, the payroll taxes would still need to be paid by April 30, 2021.

However, if reelected, President Trump promises that his administration will push Congress for forgiveness of the deferred taxes. However, because the presidential election is still pending, it remains unknown whether the new Congress will support a payroll tax forgiveness program.

It is also unknown whether employees will take advantage of this opportunity. Considering the potential employer liability for FICA taxes for employees who leave, and the awkwardness of increasing withholdings in 2021 to make up for 2020 deferrals, it’s uncertain how many employers will participate in the deferral program, in view of the major programming and logistical difficulties of implementing this change on very short notice. Forbes senior contributor Kelly Phillips Erb wasn’t optimistic when she wrote on August 28, 2020, “There are so many unanswered questions. With just days to go before the deferral period begins — that’s Tuesday — I don’t see how this will actually roll out on time. If employers were looking for clear direction from [the] Treasury and the IRS, this is not it.”

Again, employers have the option of deferring employees’ payroll taxes, according to Treasury Secretary Steve Mnuchin. Deferring the payroll taxes is not mandatory.

An example of how this deferred payroll tax would work is as follows: The employer runs payroll biweekly, with the first pay date after September 1 falling on September 7. That employer would defer the employee share of the Social Security taxes over 9 payroll periods in 2020 but would have to recoup those taxes over 8 payroll periods starting in January 2021. For an employee who earns $1,000 in wages each pay period from September 1 through December 31, 2020, the deferral would result in an increase of $62 per pay period in take-home pay through the end of 2020. Then, in 2021, the employee’s take-home pay would be reduced by $69.75 per period through April 30, 2021 to recoup the deferred taxes from September 1 through December 31, 2020.

An employee who earns $4,000 in wages per pay period between September 1 and December 31, 2020 would see a take-home pay increase by $248 per period in 2020, but his or her take-home pay starting in 2021 would be reduced by $279 per pay period through April 30, 2021.

As mentioned previously, if an employer elects to defer the employee Social Security tax withholdings and the employee leaves before the taxes are paid, that employer may be forced to pay those amounts and potentially gross-up the amount as additional wages to a former employee.

This executive order could provide some relief for those who are currently struggling due to COVID-19, but it could also create significant hardship for employees in 2021, because they could be saddled with twice as much tax being withheld from their paychecks through April 30, 2021. It should also be noted that this payroll tax deferral won’t do anything to help the approximately 28 million Americans who are currently unemployed and, therefore, not receiving salaries or having payroll taxes withheld (because unemployment benefits are not subject to payroll taxes).

Large companies, including Walmart, have been looking for guidance from the Treasury Department before proceeding with how to handle this with their employees. And, industry groups, including the U.S. Chamber of Commerce, have expressed concern regarding President Trump’s executive action and have opposed it, saying this executive order creates a substantial tax liability for employees at the end of the deferral period. In conjunction with this executive order, what’s needed is for Congress to forgive this liability, because it threatens to impose serious hardship on employees who will be facing an even larger tax bill in 2021 as a result of the deferral.

In contrast, the National Finance Center, a shared service provider for Financial Management Services and Human Resources Management Services under the United States Department of Agriculture, has already indicated that it will be implementing the payroll tax deferral per an August 21, 2020 memo. Social Security taxes are being deferred for all employees who are eligible for the initiative. The employees will have no say in this decision and will not be able to opt-in or opt-out. One can only hope that this is not going create some hardship for those employees down the line, if they don’t carefully budget now.

Potentially, a tax deferral could turn into a tax cut, but this would require an act of Congress. Given the fact that Congress can’t pass legislation with close to 30 million people unemployed and the country reeling from the economic effects of the coronavirus pandemic, it’s not highly likely that this will occur. And, if such legislation were to pass, there could be a threat to Social Security. The critical question is whether Congress will include language that reimburses the Social Security Trust fund from general government revenue. There has been limited information provided by President Trump or his advisors on whether such a reimbursement model would be used if a payroll tax cut is passed in the next coronavirus relief package. However, if a reimbursement clause is not included, then it could impair funding for Social Security and Medicare in the future.

While critics fear a payroll tax cut is an attempt to go after Social Security, there’s still too much uncertainty over President Trump’s payroll tax cut demand to validate the claim. The core issue will be whether the payroll tax holiday proposal simply cuts off revenue from the Social Security Trust Fund or whether it reimburses it from another source.

Ramifications of Buddy Punching and How to Avoid It

Nearly three-quarters of U.S. small businesses are affected annually by “time theft” or buddy punching. It occurs when a coworker punches your timecard in your absence. That employee accepts pay for time they didn’t actually work, such as staying clocked in during breaks, not clocking out to run errands, or checking social media during work hours.
Think about it. You’re running late for work and there’s no time to clock in. You send a quick text to a coworker asking them to clock in for you. Or you need to duck out a few minutes early and don’t want the boss to know. You ask your coworker to clock you out at the end of your shift. Perhaps you can’t show up for your shift and you contact your buddy for the favor of punching your timecard in/out for you.
Life happens, and it may not seem consequential, but a few minutes here and there of a coworker buddy punching for another can add significantly to your payroll. The American Payroll Association states that three-fourths of employers lose money to buddy punching and employees get paid 4.5 hours’ worth of unworked wages weekly.
An employee who buddy punches for another on their timesheet may not think it’s a serious matter, but it is. It adds up in lost revenue in a year’s time, when numerous employees cover for their cohorts. It can easily go unnoticed and entails signing another employee in when that employee isn’t present. While it’s often done to aid employees who are running late, in extreme circumstances, it can also be done when the other employee is absent. These employees don’t just steal an hour here and there. More extreme cases use buddy punching to take entire days off or accrue extra overtime. Over the course of a year, the cost of buddy punching could average close to $1,560 per employee. With the majority of small businesses generally employing less than 20 people, multiple employees using buddy punching could run your payroll expenses upwards of an additional $30,000 annually.

While workers might think of this as a method of helping out one another, it causes significant loss for many companies. The money wasted through this type of fraud can lead to budget shortages, staffing issues, and even layoffs.

When running a business, payroll expenses can be difficult to manage. It’s hard to predict how many hours you need to cover payroll or what your next quarter will bring in terms of workers hired. Regular payroll issues are hard enough to deal with, but fraud can make things even more challenging. Common payroll fraud like buddy punching can wreak havoc on your bottom line. To prevent buddy punching, you need to know how to spot it in order to ultimately spend your payroll dollars more productively.
Then, too, many companies estimate work time in order to close the payroll period before the pay period ends. For example, suppose you paid your employees on the 15th of the month for the pay period covering the 1st through the 15th. In this case, you would need to estimate their time worked for the last few days prior to the close of the pay period, because your payroll service requires 2 days for processing. You would need to send your payroll hours in for processing on the 13th, with estimated hours for the 14th and 15 th. Now imagine that an employee is late for work on one or both days for which you estimated hours. Under these circumstances, you’re considered the “buddy puncher,” because you would be paying your employees for time that they didn’t work.

Here are some measures that can help you prevent employee buddy punching:

  • Create a policy that holds employees accountable.
  • Use passwords to access your system.
  • Install a biometric timeclock.
  • Enable geofencing.
  • Use GPS tracking.

To effectively stop buddy punching, you need to be thorough. It’s not a matter of just finding ways to physically stop it from happening—you need to convince your employees that it’s a real problem that can have a negative impact on them. However, changing attitudes, just like changing habits, can be difficult. But setting up systems to ensure that punching in for others is more trouble than it’s worth can send a strong message. Your goal should be to not only block your employees from signing in for one another, but to also create an environment where doing so will be seen as a major breach of your company’s policies. A solid combination of enforcing policy and prevention will be your best defense against erroneous logins and other types of payroll fraud.

Establishing/Enforcing Policy

Buddy punching may be a sign of a deeper problem if your employees are regularly taking advantage of the timekeeping system, punching in for each other, and not being able to make it to work on time. This is an opportunity for you to take a closer look at your overall attendance policy.

Address the issue of buddy punching head-on. If you haven’t already instituted a formal policy, now’s the time to issue a zero-tolerance policy for anyone touching another worker’s timecard or using your timekeeping system under a different name—for any reason.

Hold your employees accountable. As you onboard new employees and work with existing ones, take them through training that emphasizes that they should only sign themselves in and that signing in another for any reason is strictly forbidden. Both new and existing employees should clearly understand that significant penalties can be enforced not only for those who benefit from being signed in, but also for those who perform the dastardly deed.

Your policy should stress that such behavior not only puts the employee who’s asked to sign a friend in at risk, but also the employee who “benefits” from this behavior. All employees need to understand the serious consequences of this and see it as not merely performing a simple favor for a colleague. Rather, it’s something that will negatively impact their own ability to keep getting paid.

You don’t need to call out specific employees; announce the buddy punching policy to your team as a group so everyone’s aware. Then print out a copy of the new buddy punching policy and post it where all staff can see it. If you catch an employee buddy punching, make sure they understand it’ll be grounds for termination.

You can also try a few other low-cost attendance tips:

  • Check out the quarter-shift method, whereby scheduling on the :15 can reduce lateness by 50% when looking at employees who are late, thus reducing those kinds of costs times the number of employees you have.
  • Be sure you consistently enforce your attendance policy.
  • Conduct return-to-work interviews after employees’ unscheduled absences.
  • Don’t always be seen as the “payroll police.” Reward/recognize your employees for good attendance.

Set Up Passwords

To reduce the temptation to buddy punch for another employee and protect against this type of fraud, put serious obstacles in the path of your employees. Instituting passwords is one way. Instead of your employees simply signing their names or punching a card, give each their own password that gives them access to the system. Be sure to set specific standards when issuing passwords, including long sequences, numbers, symbols, and capitalizations that make them harder to share or input by another coworker. Then educate your employees re not sharing their timekeeping login, because it could ultimately mean sharing their personal data. If they give a coworker their password, they might be giving them access to their personal information.

Instituting passwords has two major benefits:

  • It makes it more difficult for employees to login under another’s name. Then, too, it allows you to track who signed in immediately before and after the “phantom” employee, making it easier to see who’s breaking the rules.
  • Insist that your employees regularly update their passwords and be sure they keep the information to themselves. This also helps to reduce the number of potential security breaches for your clock-in processes.

Install a Biometric Timeclock

A biometric timeclock is more sophisticated than simply entering a password; biometrics ensure that only the assigned person can sign into a system. This is generally done through fingerprint or facial-recognition access. Using a biometric timeclock ensures that only authorized employees can sign into your systems. In some instances, this level of security may be the only way to deal with employees who are buddy punching. You should note, though, that biometrics tend to have some issues in terms of reliability and up-time; however, addressing maintenance issues is usually preferable to handling any kind of payroll fraud.

Biometric time systems can confirm the right employee clocks in. Only 3% of employees who commit time theft use a biometric timekeeping system. These systems eliminate buddy punching by using a unique fingerprint, handprint, or even a retina scan. They can be almost a foolproof way of keeping your employees from abusing your timekeeping system.

However, biometric time clocks can come with higher upfront costs and associated legal responsibilities. And, several states have passed laws that protect employees’ biometric information and stipulate how their information can be used. In certain instances, you must have your employees’ written consent to collect and store their biometric data. Then, there are legal procedures that must be followed related to destroying data once employees leave and their biometric data is no longer needed. You could also be responsible for notifying employees if a hack or data breach occurs.

Consider Geofencing

A geofence is a virtual perimeter that identifies a real-world geographic area. It relies on GPS, WiFi, and cellular data to create an invisible “barrier” around your business. It’s a type of security technology that trips a response whenever a certain GPS- or RFID-enabled device enters an area. It lets you decide how close your employees need to be to clock in, whether it’s the parking lot or the front door. Once the barrier is set, an employee can only clock in after their device signals that they’re inside the perimeter. Employees either have to be within a certain distance to manually clock in on the app, or they’re automatically clocked in once they’ve entered the barrier. This prevents them from clocking in away from work or having someone else clock them in. Geofencing makes it impossible for anyone to punch into your system unless the computer recognizes them as being in the proper area. These systems generally make use of RFID-enabled badges or specialized phone apps to ensure that the employee signing in is where he or she is supposed to be. Geofencing isn’t perfect, however. A clever employee can defeat it, but geofencing makes it more difficult than using a traditional timeclock system. It’s a good choice for businesses that have easily defined work spaces and a limited number of employees who work remotely.

GPS Tracking

GPS tracking is an alternative to geofencing if you have employees working in remote areas. GPS tracking can tell you where an employee is located when he or she clocks in. This allows you to make sure your remote employees are at the right job site and prevents their friends from signing them in. GPS tracking generally requires special equipment or phone apps; however, it’s becoming more common among businesses where employees work at multiple satellite locations. While the technology has its pros and cons, it will help you to better deal with the problem of buddy punching.

Review the Benefits of Updating Your Timekeeping System

A web-based timekeeping service will:

  • Have your employees use a password to time punch the clock
  • Photograph employees when they punch in and out
  • Have employees electronically sign their time sheets
  • Maintain an audit trail for every punch
  • Control the hours employees are allowed to punch in

Invest in a New Time Tracking System

Forking over money for a new time tracking system means spending funds you didn’t plan on spending the month before. However, it’s an investment that will pay for itself. As mentioned earlier, based on the number of employees you have and calculating over a year’s time, the financial loss to your company can far exceed what it will cost you to put a time tracking system in place. Often, the equipment can run in the $500 range. That’s a marked contrast to the revenue you would be losing in a year’s time.

Why Should a Small Business Outsource Their Payroll?

You started your company and it’s now thriving. As it grows, will you be adding add human resources staff to manage your payroll and other HR responsibilities? How about hiring legal teams to withstand errors or stand up against litigation you might face? Or have you considering outsourcing your payroll needs to free-up your employees to handle new challenges and provide more value to your customers? If so, how you choose the right company to handle your payroll?

As a small business, while it’s a common myth that you’ll save money by handling your payroll inhouse, in actuality, a payroll company can have your back, while it partners with you. Payroll professionals are like realtors. They’re professionals in their field and that’s all they do. It’s imperative that they keep up-to-date on all changes, irrespective of when they’re issued. Too, think of them like your tax accountant. Everyone needs one and they have the resources to guide and direct you, as regulations change and your small business grows.

Do you have the time to read up on all changes that come about, let alone have the time to implement them? And, if you overlook a regulation, are you prepared to handle the penalties associated with it? Can you juggle a cadre of tools related to payroll, and keep up with the technology and equipment involved with operating it? Wouldn’t you rather focus on serving your customers and growing your business, considering that’s your expertise and the reason you started your small business?

Selecting the Right Payroll Service for Your Business

Irrespective of what kind of business you have, think long-term. Look for a payroll provider that understands your business and will be there to support your company as it stretches and grows. When it comes to payroll, consider your payroll service provider as a trusted advisor. And, of course, do your research. Look for a payroll service that has a solid reputation for quality and service.

Because the technology related to handling payroll gets more complicated each year, choose a payroll service that will advise you on how their technology can best meet your needs now and into the future. Is the payroll provider up on which states don’t have income taxes and which ones don’t tax wages? Will the company be able to step up its services and meet your needs as your small business grows? Does it handle critical details, such as keeping up with tax tables? Ultimately, how simple or complicated is the software that you’ll be using at your end? And, be sure to ask for one or two software demonstrations during a sales presentation to make sure you’re comfortable with operating it. Is the software user-friendly; does it contain all the features that you need? Does the provider take the time to answer all of your questions thoughtfully?

One aspect of growing your business is the onboarding process. Complying with the Fair Labor Standards Act, which addresses minimum wage, child labor laws, and record-keeping requirements, is critical for the success of your business. When handled properly, it’s a win/win, because it sets your company and your new employees up to succeed. It helps to assure the new employees gets acclimated to your company quicker with minimal glitches. Plus, it’s critical that the new employee’s data be recorded accurately, such as completing their W-9s or I-9s and comparable state documents, SSN verification, and recording other necessary data so that they’re paid accurately without you incurring any penalties.

As your business evolves, is your payroll service prepared to assist you with handling human-resource responsibilities, such as:

  • Applicant tracking
  • Background screening
  • Employee onboarding
  • Electronic benefits enrollment
  • Time and attendance
  • Scheduling
  • HR Information Systems
  • Benefits tracking, accrual and leave tracking
  • Document management

To make it easier at your end, can the technology related to these services be handled from a single portal?

Features Unique to Your Industry

Does your industry require special considerations, such as job costing, paid time-off accrual tracking, multiple pay options, benefits administration, custom reports, mobile time punch tracking with GPS location verification? When your payroll service understands your industry, it can become a trusted advisor that understands the nuances of your business and offers solutions.

It’s no fun being dinged for non-compliance. Make sure the partner you select has your back when it comes to payroll and tax penalties, wage and hour, employee relations, ACA, and other evolving legislative changes. Your vendor should understand the ongoing complexity of compliance related to your small business/industry and accurately calculate payroll taxes across municipalities, keeping in mind local, state, and federal guidelines.

Then, there’s configuring all the different categories for your employees, such as: full-time, full-time exempt, full-time non-exempt, part-time, contract, contemporary, statutory, and non-statutory statuses. Each category has an impact on how your payroll is configured. Are you taxing these employees properly and delivering their benefits accurately? You can’t afford not to.

And, just as certain generations are phasing out of the work force, today’s younger generations are demanding simpler, faster ways to be paid. What would be the impact on employee morale if you missed paying your employees by one week? Falling behind on payroll tasks and delaying paying your employees can have cascading implications for your small business, as your employees are left to handle the fallout of delayed wages. Too, today’s employees expect to have their paychecks “direct deposited” into their accounts. More so, they expect employers to provide options in terms of how they’re paid. This can also mean using payroll debit cards. Therefore, it’s important to select a payroll service that provides options and is flexible when it comes to how your employees are paid.

Empower Your Employees

The bottom line is that your employees expect to be paid on time. They have no comprehension of all the behind-the-scenes data collection that’s is involved in making this happen, such as:

  • Collecting and verifying time-worked data
  • Handling new hires’ input data and paperwork
  • Entering detailed payroll data into the system
  • Conducting self-audits to ensure accuracy
  • Dealing with essential record-keeping tasks
  • All the different ways employees are paid
  • Managing tax deductions
  • Tracking employees’ insurance, garnishments, etc.

When selecting a payroll service, if you select a partner that offers Employee Self Service (ESS) functionality, you’re empowering your HR and payroll staff, because the ESS feature allows employees to view their pay stubs, timesheets, time off and accrual balances, withholdings, and more on an as-needed basis.

Then, too, it’s important to distinguish between gross and taxable wages. Some employees want to take more of their salary home each week, while others prefer a bigger tax refund at the end of the year. It’s critical to make sure these deductions are handled accurately with each pay period. Voluntary deductions can make your head spin. Are you prepared to handle:

  •  the 401k
  • health and dental insurance
  • group term life insurance
  • disability insurance
  • when appropriate, union dues
  • loans
  • uniforms
  • charitable contributions

These types of deductions can vary from paycheck to paycheck. Then, there’s Social Security and Medicare deductions. The calculations for these deductions differ for higher income earners. Plus, you could have employees who are exempt from federal and state income tax deductions. How about handling child support or garnishments. The calculations for all of these types of deductions must be handled accurately, with all factors being taken into account. Do you or your staff have the time to manually configure or create equations that will handle all of this?

Then, too, if you decide to outsource, it should be cost-effective. What does a payroll service cover when unexpected regulatory challenges arise? How quickly can they respond? Is it something your small business should handle? At what cost? Will you have to pay extra for a payroll service to cover these services, when needed? Make sure you’re absolutely clear about the lines of responsibility you and your payroll service provide. Never assume. And don’t wait for a crisis to occur to discuss these with them.

In addition, a payroll service may require you to sign on for services you’re currently not using, but as your business grows, you’ll be glad you had. Are you prepared to absorb these costs now? Or should you get a quote today for the services you’ll need later on, with the option of adding them as you need them?

Make Technology Work for You

As documented above, there’s a plethora of considerations that come into play related to payroll. It’s no longer tracking an employee’s time and writing a check weekly or bi-weekly. As a small business owner, you must carefully track large, complex data sets to ensure every paycheck your employees receive is accurate. Human capital management systems provide specific competencies and are implemented in three categories: workforce acquisition, workforce management and workforce optimization. They can track all of the fields specific to your employees’ payroll needs and automatically feed the correct data through the system, streamlining your pay processes and ensuring accuracy in paycheck configurations.

Now that you better understand the value of a payroll provider, do you choose a national or local company to partner with when it comes to your payroll needs? Of course, there are pros and cons to both. A national partner can offer more services and bells and whistles. Do you really need them? Are higher costs connected with using a national company?

Of course, we all know that a local company is often more accessible, and often provides more personalized service at an affordable price; however, can it keep up with the latest technology?

The bottom line is you know your small business best and only you can decide. If you choose an outsourced payroll provider, ASAP Payroll Service would be glad to help you think through the process to see if they’re a good fit. Just email them at: Kyle.masengale@asappayroll.com or call: 317-887-2727, or visit their website at: www.asappayroll.com.