Implementing SAP US Payroll Executive Order for Social Security Tax Deferral
In the world of US Payroll there has been a lot of talk about the Memorandum on Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster that was issued by the US president on August 8th, 2020. Specific legal updates are not something that I typically write about, but given the amount of questions, I want to provide insight into SAP’s latest delivery and how it tackles this change. Many companies I have spoken to are still in the process of deciding whether this is something they will offer and what it will look like for their organization. The only thing that is clear is that there is a lot of confusion and discussion still happening.
With a presidential memo such as this one, software companies like SAP SuccessFactors use guidance from the IRS in order to understand how to implement the changes for customers. While the memo was issued on August 8th, there was no further guidance until August 28th, 2020 (1 business day before it was to take effect). On August 28th the U.S. Internal Revenue Service issued guidelines for employers on how to defer payroll taxes for their employees in a 3 page notice which still did not have many specific details and left some things as open questions.
For SAP customers, we issued a legal change notification update to keep everyone up to date on our progress and our Globalization Services team worked many long hours to deliver this as quickly as possible as we have done for hundreds of other legal changes during the pandemic to help customers meet their needs.
On September 9th we released SAP Note 2963480 – [TAX] Executive Order for Payroll Taxes Deferral that provides a solution for customers. I decided to implement this and create a document for the broader community with a place to have a conversation on what others are doing.
Configure the Solution
The first thing that needs to be done is the solution needs to be implemented by the customer as the deferral is an employer decision. Once the employer has made this decision and decided to implement it they can configure the system to defer the taxes. Per the Note and guidelines, the solution would be relevant for employees who meet the following conditions.
- We provide the flexibility at the individual level allowing an employee to choose to have the deferral
- Payroll period check date is between September 1 and December 31, 2020.
- Employee’s applicable bi-weekly wages are equal to or lower than USD 4,000.00. For payroll areas with a different periodicity the following conversion was used:
- Weekly: USD 2,000.00
- Semi-monthly: USD 4,333.33
- Monthly: USD 8,666.67
Apply SAP Note 2963480
I did this myself, but it may also involve a basis resource. It involves going to SAP transaction SNOTE and downloading the note and applying it to the system including attaching it to a transport. For me this step was pretty straightforward even though I am not a technical basis person and it did not take very long.
Create Wage Types & Other Config
The next step is outlined in PDF attached within the note. It consists of creating Wage types /TD3, /TD5 and /TD6 to track the amount of taxes deferred for each employee:
- /TD3 – EE Social Sec. Deferral: Tracks the amount of regular Social Security deferred
- /TD5 – EE Railroad Rtmt T1 Dfrl: Tracks the amount of Railroad Tier 1 Social Security deferred
- /TD6 – EE Railroad Rtmt T2 Dfrl: Tracks the amount of Railroad Tier 2 Social Security deferred
There is a PDF document within the Note that outlines the specific steps necessary. Beyond creating the wage type it also involves creating a new Date Specification for Infotype 41 which will be entered on the employee record when someone opts in for the deferral. It also involves creating a configuration option to activate the solution in your system. These steps are explained well in the PDF and pretty straightforward and I was able to do all this configuration in less than an hour.
Enter Deferral Record on Employee
See Deferral in Payroll
Once Payroll has been run the system will not take the employee social security tax, and this would be visible in the payroll results and on the pay statement. Payroll results would also contain wage type /TD3 which would have the amount deferred.
If the company wanted visibility on how many people took the deferral and the total amount deferred they could easily run a standard report on the new /TD3 wage type to find the total. You could also very easily create a KPI in our Payroll Control Center to get visibility into this which I very quickly did to illustrate.In this case I only had one employee ($2,500 * .062 = $155).
Overall, this was an easy solution to get working which I was able to get setup quickly with the delivered SAP functionality. It is worth noting that this content is as of the publication date (September 11th 2020).
- Are employers obligated to offer this if an employee asks for it?
- No it is up to the employer whether to offer the deferral
- Why are employers cautious about offering this to employees?
- Per current guidelines the liability is on the employer to withhold and pay workers deferred taxes next year which means the employers would be on the hook for it
- Additionally, since it is a deferral it may put employees in a bad spot in 2021 as they will be getting less money and will leave them with less money in 2021 checks beginning in January until they pay this back
- If an employer decides to offer this, will all employees be eligible to participate?
- No there is a pay threshold of $4,000 bi-weekly so for anyone making more than this they would not be eligible to participate in the deferral
- Will the taxes not taken be forgiven or will the employee have to pay them back?
- As of the date of this publication this is a deferral which means the taxes will have to be paid back
- This topic is actively being debated in the US House of Representatives so it is very possible that additional updates may be given
- With a tax deferral what will happen in 2021?
- Social Security taxes are currently a fixed rate of 6.2% in 2021. Based upon the current guidelines in 2021 the taxes would be taken back beginning in January which means the employee would be getting less money in their 2021 checks until they repay the amount covered
- Does the delivered SAP solution include payment of deferred taxes and recovery in 2021?
- No, per the SAP Note due to the complex nature of collective bargaining agreements and limited guidance from the IRS, payment of the deferred taxes and recovery in 2021 are not automated, and currently out of scope for this delivery
- Does this SAP solution include the ability take any taxes that were withheld in case of termination?
- Yes, for recovery within 2020 (in case of terminations), the employer just need to retroactively remove the election to tax deferral from the Date Specification record and the system will recompute the applicable taxes for each of the periods and bring it into the termination payment run and the taxes will get withheld and remitted as usual. This is already automated and will work as-is.
- What does this mean for tax forms such as the W2?
- This is unclear based upon current guidelines. There is possibility of further guidance being issued on how the deferral affects reporting for W2 ( Box 3 and Box 4 ) for both the current year and the next year when the recovery may be done. .
- Is there any additional information on this topic?
- Here is a link to a CNBC article on 5 key things workers shoiuld know about the tax deferral that I found was helpful in answering some questions
- Here are some details on US House Democrats plan on seeking to overturn the the deferral
- Here are some details on US House Republicans plan to offer payroll tax forgiveness
Thanks for taking the time to read and I hope this was helpful in providing transparency on how we have been working on this from an SAP solution standpoint. Would love to hear your comments in the chat on what your organization or what your customer is doing to address this.
Imran, this is really helpful - a good thorough review of a still "shady" situation. 🙂 Beyond the note from SAP, there are decisions customers will need to make about HOW they manage requests for deferrals, ensuring employees understand that it is just that - a deferral. Eventually, the employee will need to pay the taxes. I would envision employers who opt to offer this having to set up a formal request process and define the activity to be done by system admins upon receiving a request and also upon removing the deferral. I would also think there is a fair risk that an employee who leaves the organization in 2020, will not have sufficient pay to cover taxes in the last paycheck and/or will not be giving sufficient notice to the employer to recover those taxes.
Thanks for the comment and adding your perspective Sherry. Definitely much to consider for customers and if it makes sense for their business to implement this. I would highly recommend organization put out proper education to employees if they decide to implement it. It certainly could put some employees in a bad position in early 2021 if they are not aware that their future checks will be lower when they have to pay this back.