President Trump issued an executive order on August 8, 2020, providing for the deferral of the employee's portion of Social Security taxes for certain employees for the period beginning September 1, 2020, through December 31, 2020. The president has instructed the secretary of the treasury to provide guidance to implement the order and to also explore avenues, including legislation, for eliminating the obligation to pay the deferred taxes.
Earlier this year, Congress permitted employers to defer their portion of Social Security taxes under the Coronavirus, Aid, Relief, and Economic Security Act for the period beginning March 27, 2020, through December 31, 2020. This order seeks to extend the deferral to the employee portion of Social Security taxes by executive action.
The order directs the secretary to use his authority under Internal Revenue Code (IRC) Section 7508A to defer the withholding, deposit, and payment of the employee’s portion of Social Security taxes imposed under IRC Section 3101(a) (6.2%) on wages paid from September 1, 2020, through December 31, 2020. The order also calls for a similar deferral with respect to employment taxes under the Railroad Retirement Tax Act.
Under IRC Section 7508A, the secretary has the authority to postpone tax-related deadlines for taxpayers “affected” by a disaster declared by the president. Such authority has typically been used to postpone tax filing and payment deadlines for more localized disasters, such as wildfires and hurricanes.
The deferral is available with respect to an employee whose pay during a biweekly pay period is “generally” less than $4,000, calculated on a pretax basis, or the equivalent amount with respect to non-biweekly pay periods. The amounts will be deferred without any penalties or interest.
There are several aspects of the order employers should consider with great caution:
- There is an expectation that the legality of the order will be challenged through litigation.
- It appears that the deferral is not available until the secretary issues guidance to implement the order (and no such guidance has been issued to date).
- The order is not clear as to whether employees need to opt in to make the deferral.
- The order does not provide guidance on what it means to have wages “generally” less than $4,000 during a biweekly pay period.
- If the deferral is applied, it is not clear when the deferred amount would be required to be paid (although the order directs the secretary to explore “avenues” to eliminate the obligation).
The secretary has not issued any guidance on the order other than to informally indicate that the suspension will not be mandatory. In light of these open issues, we recommend that employers await further guidance before making changes to their payroll practices.