On August 29, 2020, the Secretary of the Treasury issued guidance with respect to the Executive Order.
1. Which Payroll Taxes Are Applicable?
The employee portion of the F.I.C.A. tax on employee wages imposed by Section 3101(a) of the Internal Revenue Code (i.e., the 6.2 percent Social Security/F.I.C.A. tax on employee wages), and the equivalent under the Railroad Retirement Tax Act (collectively, the “Payroll Taxes”).
2. What Is the Deferral Period?
The Deferral Period is the period commencing on September 1, 2020 and ending on December 31, 2020.
3. Who Is Eligible?
Employees who are paid monetary wages or compensation (i.e., compensation typically subject to Social Security tax) during the Deferral Period, but only if such wages or compensation paid for a bi-weekly pay period is less than Four Thousand and 00/100 Dollars ($4,000.00), calculated on a pre-tax basis, or the equivalent amount with respect to other pay periods (“Eligible Employees”). The determination of eligibility is made on a pay period-by-pay period basis.
4. What Does Deferral Mean?
Typically, employers must withhold from its employee’s paycheck, and deposit and pay the same to the U.S. Government, the Payroll Taxes (i.e., the employee’s share). Under the Executive Order, the employer may defer withholding such Payroll Taxes for each Eligible Employee during the Deferral Period. This will result in such Eligible Employee receiving more “take home pay” during the Deferral Period without incurring additional taxes, penalties, or interest.
5. Does the Employer Still Have to Pay Payroll Taxes to the Government?
Not during the Deferral Period. Since the employer’s deposit and payment obligation for employee Payroll Taxes does not arise until the Payroll Taxes are withheld from the employee, if the employer does not withhold such Payroll Taxes from an Eligible Employee during the Deferral Period, the employer may defer paying the same to the U.S. Government during the Deferral Period, without penalty or interest.
6. What About the Employer’s Share?
The Executive Order only relates to the employee’s share of Social Security tax. The Executive Order has no impact on the employer’s obligation to pay the employer’s share of Social Security taxes with respect to each employee.
Note, however, that the previously passed Coronavirus, Aid, Relief and Economic Security Act (the “CARES Act”), already permits employers to defer the deposit and payment of the employer’s share of Social Security Tax during the period from March 27, 2020 through December 31, 2020.
7. What Happens After the Deferral Period?
Since only Congress can permanently forgive the payment of Payroll Taxes, the deferred Payroll Taxes must be paid to the U.S. Government after the Deferral Period. Any such Payroll Taxes properly deferred during the Deferral Period must be paid to the U.S. Government between January 1, 2021 and April 30, 2021 (the “Repayment Period”).
8. After the Deferral Period, Who Must Pay the Deferred Payroll Taxes?
During the Repayment Period, employers must withhold from each Eligible Employee’s paychecks, the amount of Payroll Taxes deferred for such Eligible Employee during the Deferral Period. In essence, this results in a double withholding during the Repayment Period as both the current and previously deferred Payroll Taxes must be withheld.
9. EMPLOYERS BEWARE: What if an Eligible Employee Is No Longer Employed After the Deferral Period?
If an employer deferred the Payroll Taxes of an Eligible Employee during the Deferral Period and such Eligible Employee is no longer employed by such employer during some or all of the Repayment Period, the employer may try and collect such deferred Payroll Taxes from the former employee, however, the burden is on the employer to pay such deferred Payroll Taxes to the U.S. Government, regardless whether the employer is successful in collecting it from the former employee.
10. What if the Deferred Payroll Taxes Are Not Repaid?
Any Payroll Taxes properly deferred during the Deferral Period which are not repaid, in their entirety, during the Repayment Period, will start to incur interest and penalties as of May 1, 2021.
11. Are Employers Required to Defer Payroll Taxes?
It is unclear from the Executive Order whether such deferral is optional or mandatory during the Deferral Period. However, based on the Internal Revenue Code section which is used as authority for the guidance issued by the Secretary of the Treasury (IRC Section 7508A), and based on some press releases from the IRS and the U.S. Treasury, it appears that the program is not required and that employers can choose whether to defer such Payroll Taxes. Given Item 9 above, employers should be cautious in deferring such Payroll Taxes.