On August 8, 2020, President Donald Trump issued an Executive Order and Memorandum on Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster (Memorandum).
Pursuant to the Memorandum, the Secretary of Treasury is directed to use his authority to defer the withholding, deposit and payment of the employee portion (6.2%) of social security tax (or FICA) on wages or compensation paid between September 1, 2020, and December 31, 2020.
This withholding deferral applies only to employees with wages or compensation payable during a biweekly payroll period that are generally less than $4,000, calculated on a pre-tax basis or the equivalent amount during other payroll periods. Amounts deferred will be without penalties, interest, additional amounts or additions to tax. The Memorandum also directs the Secretary of the Treasury to issue additional guidance regarding the implementation of the deferral.
It is important to note that the Memorandum only provides for the deferral of the employee portion of FICA—not complete forgiveness. In the absence of further action to eliminate the obligation to pay these deferred taxes, affected employees will be required to pay the deferred tax following the end of the deferral period. Note also that this Memorandum is separate from the CARES Act provision which allows businesses to delay payment of the employer portion of FICA until December 31, 2021, and December 31, 2022. For more information, please read our previous eAlert titled “CARES Act Includes Many Tax Relief Provisions for 2020.”
It is unclear from the Memorandum itself whether the deferral is mandatory or discretionary, or what the process entails for paying the deferred tax at the end of the deferral period. The concern with the proposal is that these are trust fund taxes and that failure to pay can result in the assessment of the so-called 100% penalty on responsible individuals if not paid. Whether the penalty waiver will apply to the 100% penalty was not specified. Furthermore, it is not clear how employers will recoup the funds from employees once wages without reduction of the employee share of FICA are paid, whether the deferred taxes can be recouped at all or whether the employees will themselves have to make this remittance as part of their personal tax obligations. The Secretary of Treasury’s guidance will provide further information and clarification which may implement rules for self-employed individuals as well.
The policy in the Memorandum is to assist American workers and stated that it would be the goal for this to be a tax holiday as opposed to a mere deferral although this would require legislative action. If this deferral becomes a tax holiday then many of the above issues would be resolved.
Employers should continue to monitor guidance from the Secretary of Treasury and wait to review such guidance before implementing changes to their payroll withholding processes.
If you have any questions regarding the Executive Order and Memorandum, please contact Sean Cook, Jay Kennedy, William Lentine, Jeff Segal, Philip Haywood or any member of Warner’s Tax Law Practice Group.