On August 8, President Trump issued an Executive Order directing the Secretary of the Treasury to defer the withholding, deposit, and payment of certain employee payroll taxes. The Order followed unsuccessful Congressional negotiations over another Coronavirus relief package. The President’s Order is brief and leaves significant questions as to its implementation. These questions must be answered by Treasury, and hopefully they will have them answered soon. The Order covers wages paid during the period beginning on September 1.
While we (not so patiently) await guidance from Treasury, let’s break down what we do know about the President’s Order.
To which payroll taxes does the Order apply?
The Order applies only to the employee’s share of Social Security taxes (and the equivalent amount of Railroad Retirement Act taxes), which are imposed at a rate of 6.2% and withheld by employers from employees’ wages. The Order does not apply to either the employee’s or the employer’s share of Medicare taxes. It also does not apply to the employer’s share of Social Security taxes; the CARES Act already allows employers to elect to defer the deposit and payment of the employer’s share of Social Security taxes due during the period beginning on March 27 and ending on December 31, 2020.
What period is covered by the Order?
The Order applies to wages and compensation paid during the period of September 1, 2020, through December 31, 2020. Thus, wages paid on September 1 for work performed in August appear to be covered by the Order. By contrast, the Order does not appear to apply to wages paid in January 2021, even if they were earned on or before December 31.
Does the Order apply to all employees?
No. The Order applies only to employees whose wages payable during any bi-weekly pay period “generally” are less than $4,000, calculated on a pre-tax basis, or the equivalent amount with respect to other pay periods. This means that employees whose pre-tax wages are less than $104,000 annually appear to be covered by the Order. However, it is unclear how the Order applies to employees who receive a bonus or whose salary varies or to temporary or seasonal workers.
Will the taxes be forgiven?
Importantly, the President’s Order only defers these taxes; the Order specifies that the taxes will “be deferred without any penalties, interest, additional amount, or addition to the tax.” This means that absent further action, the taxes will be due eventually, although the Order does not set a due date.
The Order directs Treasury to “explore avenues, including legislation, to eliminate the obligation to pay the taxes deferred.” According to many tax and legal practitioners, forgiving the deferred taxes will take an Act of Congress.
Are employers required to participate?
One major question raised by the Order is who bears responsibility – the employer or the employee – for making the election to defer. As noted, the Order defers the employee’s share of Social Security taxes, but it is the employer’s responsibility to withhold these amounts. Treasury Secretary Mnuchin publicly stated last week that the payroll tax deferral will not be mandatory for employers, noting, “We can’t force people to participate, but I think many small businesses will, and pass on the benefits.” However, it remains unclear whether the employer or the employee must affirmatively elect to defer the taxes (and how they do so).
A related question is which party is liable for the deferred taxes if they are not forgiven. If liability falls on the employer, this creates practical problems for employers whose employees may no longer be on the payroll when the deferred taxes are due. If the employee is responsible for the deferred taxes, it is unclear when or how the employee pays the deferred liability.
As always, we will continue to keep you apprised of any significant developments.
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