On August 8, 2020, President Donald Trump signed a presidential memorandum to defer payroll taxes through 2020, for individuals making less than $104,000 annually. Mr. Trump’s executive actions, which includes three other orders concerning unemployment benefits, eviction and student loans, comes on the heels of an apparent impasse last week for Congressional negotiations on the next economic stimulus package. Many of the original relief programs created by Congress have expired or will shortly expire. Discussions between bipartisan lawmakers and the Trump administration are expected to resume this week.
Deferral of Payroll Tax
The memorandum directs the Secretary of the Treasury to use his authority under the Internal Revenue Code to defer certain payroll tax obligations with respect to certain “qualifying” American workers. Under this provision of the Code, The Secretary may defer the withholding, deposit, and payment of the 6.2% Social Security tax imposed, as well as the 6.2% railroad retirement tax, on wages or compensation paid September 1, 2020, through December 31, 2020.
The deferral shall be made to any employee whose wages or compensation, payable during any biweekly pay period, generally is less than $4,000 (calculated on a pretax basis). Amounts deferred pursuant to the memo shall be deferred without any penalties, interest, additional amount, or addition to the tax.
While the memorandum also directs the Secretary to explore other avenues, including legislation, to eliminate the obligation to pay the deferred taxes, there is currently no guarantee that the amounts deferred under this Presidential order will be forgiven. If such were not the case, the question remains as to who will ultimately be responsible for the payment of the deferred amounts when they come due.
Employers are responsible for the collection and remittance of payroll taxes. It is not difficult to envision a circumstance where monies that have not been collected timely from employees due to the deferral are “non-recoverable” at the later date with any payments due falling to the employer. As such, there is concern within the employer community as to the effectiveness of this deferral. In many cases, employers have noted that they will not participate directly but, rather, set those taxes aside that are deferred until it is known whether the deferred taxes will be forgiven.
There is also deep concern within both parties in Congress that this payroll tax deferral will work to further gut the Social Security system. Mr. Trump told reporters on August 10, 2020, that his executive action “will be reimbursed through the General Fund, and it will have no impact on Social Security.” However, the details in the order are insufficient to ensure this result at this time.
At this time, the legality of the executive action deferring payroll taxes is in question, primarily among Democratic lawmakers. In that vein, the President himself alluded that he expects challenges to the Presidential Memorandum in court, but that his administration is confident those challenges will fail.
For employers, the issue is what actions should be taken in the interim. Until further clarification is provided by Treasury, it is likely best for employers to take no action and to continue withholding the taxes as normal, reserving them for employees when, and if, the amounts are forgiven.