On August 8, 2020, President Trump issued an Executive Order directing the Secretary of the Treasury Steven Mnuchin to defer the withholding, deposit, and payment of certain payroll taxes beginning September 1, 2020 through the end of 2020. The Order left several important questions open and directed the Treasury to issue guidance to implement the Order. Secretary Mnuchin finally issued guidance on August 28, 2020, but many questions remain.

Q: Is the deferral mandatory?

A: No. For several reasons, the President cannot force employers to defer the payment of payroll taxes that are otherwise due under the Tax Code. Secretary Mnuchin has acknowledged that neither the President nor Treasury has the authority to force deferral.  

Q: What payroll taxes are included?

A: The Order only applies to the employee portion of Social Security taxes associated with wages paid from September 1, 2020 through the end of 2020. Further, the Order only applies to employees whose wages are less than $4,000 per bi-weekly pay period (or less than $104,000 annually).

Q: Will the payroll taxes be forgiven entirely?

A: It is not guaranteed that the payroll taxes will be forgiven. The President’s Order directs Treasury to explore avenues to forgive the deferred taxes, but it would take an act of Congress to forgive them. There is no certainty that Congress will choose to do so.

Q: If the payroll taxes are deferred, how and when must they be paid?

A: The deferred taxes must be paid by the employer by withholding additional amounts from employee’s paychecks issued from January 1, 2021 through April 30, 2021. In the simplest case, this would result in employers withholding an additional 6.2% from each employee’s paycheck for the first four months of 2021. Failure to repay the deferred amounts by April 30, 2021 will result in penalties and interest for the employer.

Q:  What if a current employee leaves or is terminated at the end of 2020 - who pays the taxes?

A: The guidance indicates that an employer may “make arrangements to otherwise collect” the deferred payroll taxes from a departed employee. It is not hard to imagine instances where it would be difficult to make such an arrangement, and in that case, the employer is on the hook for the full amount of the deferred payroll taxes. 

The Big Picture

The guidance left many unanswered questions, particularly regarding the logistics of how to implement the payroll deferral and how to repay the deferred taxes in the event they are not forgiven by Congress.