President Trump signed a presidential memorandum (“Payroll Tax Deferral Order”) on August 8. The Payroll Tax Deferral Order defers the employee’s share of the 6.2% Social Security tax under Code Sec. 3101(a) (as well as the similar provision applicable to railroad employees under the Railroad Retirement Tax Act) payroll taxes from on wages or compensation paid during the period starting September 1 through December 31, 2020, for individuals making less than $104,000 annually. The deferral is without any penalties, interest, additional amount, or addition to the tax. Because of the annual wage limit, the maximum tax deferral is $124 per week, and $2,232 from September 1 to December 31, 2020.
The Payroll Tax Deferral Order is in addition to deferral of the employer’s share of FICA taxes under the CARES Act. The CARES Act separately permits both employers and self-employed individuals to defer the employer portion of OASDI otherwise payable through December 31, 2020, with half due on December 31, 2021, and the remainder due December 31, 2022. That relief also applies to self-employed persons. It is uncertain if the Payroll Tax Deferral Order deferral would follow a similar payment schedule.
The Payroll Tax Deferral Order does not provide any relief from the Self-Employed Contributions Act (SECA) tax that self-employed individuals pay (typically with quarterly estimated taxes), or the employer’s side of the Social Security payroll taxes.
There are numerous other questions and issues while we wait for pending Treasury guidance implementing the deferral.
The employer withholds the employee’s share, of the Federal Insurance Contributions Act (FICA) tax from employee wages, and pays the employer’s share. This includes for each of the employee and the employer, the 6.2% Social Security tax (old-age, survivors and disability insurance (OASDI)) tax on wages up to the annual Social Security wage base ($137,700 for 2020); and the 1.45% Medicare tax (hospital insurance (HI)) tax on all wages paid.
The Payroll Tax Deferral Order does NOT address the employee’s share of the 1.45% Medicare tax on wages under Code Sec. 3101(b), which still needs to be withheld, deposited, and paid during the deferral period.
The deferral is for employees paid during any bi-weekly pay period “generally less than $4,000,” which may cause issues if pay is irregular, and if greater, it appears none of the social security is deferred.
How deferral applies to workers with more than one job (or with side gigs) is not yet clear.
The President asked Treasury to investigate forgiving the deferred payroll taxes, but the Code §7508A authority for this deferral only allows for a delay in payments in response to a disaster declaration. Most commentators believe it requires an act of Congress to eliminate the deferred tax, and because there does not appear to be broad Congressional support to make the deferral permanent, the likelihood is that employers (and employees) will have to make a large tax payment at the beginning of 2021.
If the deferred taxes are not ultimately forgiven through legislation or otherwise, employees will be subject to substantial withholdings to make up for the deferral. An employee earns $1,000 per week during the 18 weeks from Sept. 1 through Dec. 31 ($52,000 per year), will defer approximately $1,116 in OASDI tax not withheld from their paychecks. Recouping the deferred tax from an employee through withholding after Dec. 31, 2020, could prove problematic for the employer, and cause financial hardship for some employees.
Although an employee ultimately remains liable for his or her own taxes, the employer may be unable to recover deferred taxes paid to a former employee if an employee changes jobs during the deferral period, but the employer would still be liable for the payment of the deferred taxes beginning in January 2021.
Without certainty that the tax would be forgiven, employers may be reluctant to participate in the deferral, and will want to set aside the employees’ share of payroll tax to pay the IRS later, rather than giving the money to employees.
However, employers may not be permitted to treat the Payroll Tax Deferral Order as voluntary, and may be required to temporarily cease withholding the employee’s share of the tax in addition to not depositing and paying the tax.
Treasury Secretary Mnuchin August 12, 2020 comments suggest that the Payroll Tax Deferral Order is expected to be “optional for employers.” But federal and state wage payment laws permit employers to withhold payroll and other taxes without employees’ written consent only if those taxes are then due and owing. In other words, employers must have an employee’s written permission to withhold anything from their wages that the employer is not required to withhold.
The IRS issued Notice 2020-65, I.R.B. 2020-38, August 28, 2020. The notice does not clarify whether the deferral is mandatory or voluntary. The notice provides that employers must withhold and pay the total Applicable Taxes that the employer deferred ratably from wages and compensation paid between January 1, 2021 and April 30, 2021, or interest, penalties, and additions to tax with respect to any unpaid Applicable Taxes will begin to accrue on May 1, 2021. If necessary (i.e., the employee is no longer employed for the employer to be able to withhold the deferred taxes), the employer may make arrangements to otherwise collect the total Applicable Taxes from the employee.
Again, there will be more questions, and more guidance is required.