Payroll Taxes

Fallout From the Payroll Tax Deferrals of 2020

  • Payroll taxes, otherwise known as Social Security taxes, were allowed to be deferred in 2020, to be paid later.
  • The 12.4% Social Security tax rate on wages is split evenly between the employer and the employee, up to a maximum wage base ($137,700 in 2020).
  • Employers were allowed to defer their share of the tax for much of the year; the deferral for employees was only effective from Sept. 1,  2020, through Dec. 31, 2020.
  • There are no payroll tax deferral options in play for 2021.

In March 2020, a provision of the Coronavirus, Aid, Relief and Economic Security Act (CARES Act) allowed employers to defer the deposit and payment of the employer’s share of Social Security taxes from March 27, 2020, through Dec. 31, 2020. 

Later in 2020, President Trump, in an administrative move, declared  that starting Sept. 1, 2020, through the end of 2020, employers were allowed to stop withholding Social Security taxes from employees, effectively deferring the employee’s share of the tax for the last quarter of the year.

These two separate programs allow employers to pay the amounts deferred at different times in the future, depending on whether the deferral was for the employer portion of the tax, or the employee portion.

Employer Payroll Tax Deferral: What's Next

The CARES Act deferral time frame ended Dec. 31, 2020, and the liability to pay the taxes remains. All employers were allowed to take advantage of the deferral, but those that deferred paying the taxes did not have their Social Security tax liability waived. Reporting of the liability on quarterly Forms 941 still was required. The payment of the taxes accrued have only been delayed by this law.  

IRS guidance initially said that half the payment of the deferred employer-portion taxes  (of the total amount actually deferred for the quarter) would be due Dec. 31, 2021, with the other half due Dec. 31, 2022. This has changed. Now, regardless of amounts actually deferred, half of the total amount of the employer portion of the tax still owed for 2020 is due Jan. 3, 2022, with the other half due Jan. 3, 2023.  See IRS FAQs for more details on the continued obligations of employers that deferred their portion of the Social Security tax in 2020.

Employee Payroll Tax Deferral: Changing Options

The deferral of the employee portion of the Social Security tax was announced by President Trump in August 2020, with the plan for it to be effective from Sept. 1, 2020, until the end of the year.  

Almost immediately, many employers announced that they would not or could not make the deferral happen for their employees. The Treasury Department stated that employers would not be forced to defer withholding of employee wages to pay for the tax that would have become due by April 2021 anyway. President Trump indicated the employee portion could be legislated away in early 2021, making the payment of the taxes deferred moot.

There appeared to be too much to change in a short period of time for systems to pivot and put in place a complicated process that involved limiting the deferral to those employees whose biweekly pre-tax compensation generally was less than $4,000.  In addition, it appeared that employers would need to ensure that employees who had the tax deferred, paid the deferred amounts off by the end of April 2021, or would be liable for the taxes, penalties and interest.

Several federal agencies and some, but not many,  private employers stopped withholding on worker Social Security taxes through Dec. 31, 2020. These employers are to withhold, deposit and pay the deferred amounts from Jan. 1, 2021, to Jan. 3, 2022 (Dec. 31, 2021 falls on a public holiday). These amounts are to be withheld and paid in addition to normal Social Security taxes withheld for 2021 for 2021 wages.

Generally, employers that implemented the deferral of employee portion of the Social Security tax are to apportion additional withholding on the employee wages during 2021 so that by Jan. 3, 2022, the deferred tax amounts from 2020 have been completely eliminated.

So far for 2021, there is no indication that there will be other actions to defer Social Security taxes. But payroll professionals know that there always is a possibility this could happen again, in some form, as part of a future economic stimulus package. PYD

On Demand Payroll

How Does the CFPB’s Earned Wage Access Guidance Impact Payroll?

  • Understanding on-demand pay/earned wage access for payroll purposes 
  • Why are employers and employees seeking this payment option?
  • New guidance distinguishes on-demand pay from loans
  • What does this have to do with payroll compliance?

Have you, in your role in payroll, been involved in some way in earned wage access (EWA) or on-demand pay? 

These are not advances in pay in the sense that we are used to, say, when an employee asks for and gets an advance on next week’s pay but has not worked the week yet. That’s an advance. 

I’m talking about access, on demand, to amounts already earned. That’s what an ever-growing number of third-party providers are claiming they do. They work with employers to get payroll data for employees to determine amounts accrued for working. This includes daily or even hourly feeds of timekeeping information and, for the most sophisticated programs, algorithms that can calculate prorated net pay.

Why Is On-Demand Pay/EWA Growing?

Employers are attracted to offering some sort of on-demand pay because of increases seen in retention, engagement and the ability to recruit workers. With reliance on accurate time accruals to determine amounts available, colleagues have told me they have noticed far fewer timeclock discrepancies. People are more conscientious about clocking in and out. Some of these third-party programs add tasks for payroll though, while some don’t.

Hourly workers, and those who live paycheck-to-paycheck, see a lot of benefit in being able to draw on their pay before payday to pay bills or to deal with unexpected expenses. Salaried workers also are benefiting from earned wage access tools.

Most of these programs generally are not considered loans or credit, but I’ve been told to beware of some of these outfits because they really are online payday loan operations, or they employ a lot of payday loan-like processes, especially to get their money back.

New Guidance Addresses Loan/Not Loan Question

At the end of 2020, the Consumer Financial Protection Bureau (CFPB) started to address this situation, releasing first an advisory opinion and, second, a temporary approval order for one of the providers allowing them to continue to operate not as a loan operation so long as they follow some strict guidelines. They will be reassessed in two years.

The CFPB EWA order could have gone one of two ways. The Bureau could have said their approach is credit, and then the outfit would have been considered a loan operator that has to meet all kinds of requirements under the consumer codes, and they would have to stop operating in several states (a number of states outlaw payday loan operations). But, the CFPB said this one approach to on-demand pay is excluded from being considered a credit or loan program for at least the next two years.

It was all about whether a particular on-demand pay company’s offering was considered credit. 

The order does not rule on the status of other third-party providers, instead speaking to their potential issues indirectly, laying out how other earned wage access provider programs also are not likely loan operations. That’s where the story ends here with this guidance.

Payroll Compliance and Burden

But for payroll, the story really ends with ensuring not whether some vehicle for providing earned wage access is a loan, but with protecting the employer from undue compliance exposure and burdensome, expensive processes when offering such programs.

Face it, just about all third-party providers of anything involving payroll say they are fully compliant. We all have to look into those claims. The issue the CFPB addressed had literally nothing to do with payroll compliance. 

In fact, wage deductions were the provider’s proposed repayment method in the CFPB application, but wage deductions as a way to repay amounts under an earned wage access program remain illegal in several states. 

Other on-demand pay providers do not use wage deductions to recoup on-demand amounts. 

As such, these providers don’t believe there is a need at this time to request a determination from the CFPB.

This is why we’ll see some on-demand pay providers scrambling to get the CFPB to state their particular programs are not credit, and others that are more secure in their particular existing on-demand pay solution, do not see that need.

Whatever the solution you are presented with, know that CFPB approval of an approach will not address the payroll angle on the employer’s side, so please remember to vet for payroll compliance and additional burden. PYD

Payroll Tools

A Roadmap to Payroll Certifications (CPP and FPC)

  • The American Payroll Association (APA) has two general payroll certification programs
  • A Certified Payroll Professional (CPP) designation can be earned by those working in payroll for several years
  • The Fundamental Payroll Certification (FCP) generally is available for those who are new to payroll
  • To retain certified status, both designations require approved continuing education

Shortly after the American Payroll Association was formed In the early 1980s, an effort began to educate and elevate those working in payroll through a certification program. The purpose behind this push was to lend some legitimacy to payroll becoming a professional career track with specialized knowledge needed to understand the key functions and master the operations.

Two certification programs for payroll professionals

Nearly 40 years later, the APA oversees two types of certification programs and tests: the Certified Payroll Professional, or CPP, and the Fundamental Payroll Certification, or FPC. 

The APA has developed other certificate programs geared toward specific aspects of the payroll function, and there are certificate programs, including payroll, in several colleges and universities, but there are no other widely available general payroll certifications in the United States. One cannot yet get a four-year college degree in payroll.

Canadians have their own certification exam process through the Canadian Payroll Association, and there are similar designations and degrees that payroll professionals can achieve in the U.K. and in other countries.

To become a Certified Payroll Professional

To earn the CPP designation, individuals are required to meet two experience criteria and pass a four-hour exam. The first criteria allows those to take the exam if they have worked in payroll for three of the past five years, and there are definitions for qualified payroll work. 

The second criteria requires at least 24 consecutive months of work in payroll and the completion of a set of courses before taking the exam.

Then the 190-question exam can be scheduled and taken. It is recommended that those desiring the CPP designation do some preparatory training. The exam covers seven key areas of payroll, including core payroll concepts, compliance, calculation of pay, payroll systems, payroll management and administration, audits and accounting. 

While the APA provides extensive study material, local APA chapters throughout the country also conduct CPP-related training classes. 

Recent APA statistics show that approximately 50% of those taking the CPP exam pass and become CPPs. 

The designation is effective in five-year increments, and it can be renewed by participating in continuing education through programs that offer Recertification Credit Hours (RCHs), the APA’s version of CLEs for legal continuing education, or CPEs for certified public accountants. The APA allows some payroll-related curriculum with CLE and CPE designations to be converted to RCH equivalents.

Should an individual fail to show an accumulation of 120 RCHs after five years, they can lose their CPP designation and, to get it back, they may need to take the CPP exam again. 

Since the first CPP test was developed in 1985, there are now more than 11,000 active certified payroll professionals, according to the APA. 

More information on CPP eligibility and the exam is available on the APA website.

The Fundamental Payroll Certification program

The first FPC designation was developed in 2000 as a way for the APA to recognize those who may be new to the payroll field or who are working in some areas of payroll but are not working directly as payroll professionals. This includes sales professionals/consultants serving the payroll industry, systems analysts/engineers supporting payroll systems, and payroll service provider client representatives.

Candidates are allotted three hours to complete the 150-question exam that covers the same seven key areas of payroll that are included in the CPP exam. 

Approximately 75% of those taking the FPC exam pass, according to recent APA statistics. There are now more than 7,000 FPC’s.

More information on FPC eligibility and the exam is available on the APA website.

Both exams are available over a four-week period in the fall and spring and, starting in 2020,  exams have been proctored remotely.