On August 8, President Trump issued an Executive Memorandum (which has the same practical effect as an Executive Order), directing the Secretary of the Treasury to exercise his authority under section 7508A of the Internal Revenue Code to defer the withholding, deposit, and payment of certain payroll taxes for the period from September 1, 2020, through December 31, 2020.
What are the parameters of the deferral?
- Employers can defer the withholding, deposit, and payment of the employee portion of the Old Age, Survivors, and Disability Insurance (OASDI) segment of FICA taxes, i.e., the 6.2% tax on employee wages imposed by section 3101(a) and the equivalent amount under the Railroad Retirement Tax Act (RRTA) imposed by section 3201(a).
- The deferral applies only with respect to employees who generally are paid less than $4,000 per biweekly pay period ($104,000 annually) on a pre-tax basis, or the equivalent amount for other pay period frequencies.
- The deferral applies to taxes on wages paid from September 1, 2020, through December 31, 2020.
- No interest, penalties, or other additional amounts or taxes will apply to the deferral.
- The amounts affected by the Executive Memorandum are only deferred, not forgiven, although the Executive Memorandum directs the Secretary of the Treasury to explore avenues, including legislation, to eliminate the obligation to pay the deferred taxes.
- The Executive Memorandum directs the Secretary to issue guidance to implement the payroll tax deferral.
What is not affected by the deferral?
- For employees whose compensation is generally equal to or greater than $4,000 per biweekly pay period (or equivalent), the employee portion of OASDI and RRTA must continue to be withheld, deposited, and paid on the usual timeline.
- The deferral does not apply to either the employer or the employee portion of Medicare or Additional Medicare taxes, i.e., the 1.45% or 0.9% taxes, regardless of the employee’s compensation.
- The Executive Memorandum does not affect the payment of the employer portion of OASDI and the equivalent amount of RRTA, which were permitted to be deferred by section 2302 of the CARES Act for the period between March 27, 2020, and December 31, 2020. Fifty percent of this deferred amount is due on December 31, 2021, and 50 percent is due on December 31, 2022.
- There is no deferral for payroll taxes on wages paid on or after January 1, 2021.
Eversheds Sutherland Observations
The Executive Memorandum leaves open a number of questions and issues, some of which will likely be addressed by guidance from Treasury:
- The deferral appears to be voluntary on the part of employers, but confirmation of this point will be important. CARES Act guidance indicates that an employer may deposit and pay deferred taxes on time or at any time prior to the applicable due date, but that any tax which is already deposited or paid cannot later be deferred.
- A number of questions arise regarding withholding of any deferred amounts from employees if there is no permanent forgiveness. Employers will need to carefully weigh these issues and take into account forthcoming guidance in deciding whether to implement the deferral.
- Will the employer be required to withhold all of the deferred amounts from the first paycheck on or after January 2021? Or will there be an extended time for collection and deposit? A lump sum repayment could cause significant financial hardship for some employees, particularly if it is required right after the holiday season.
- Practical difficulties may arise with respect to employees who terminate employment before January 1, 2021. To the extent the employee portion of OASDI was deferred, an employer may want to withhold it from paychecks prior to termination of employment, unless there is guidance permitting the employee to pay the deferred portion on their federal income tax return or by other means. For lower-paid employees, this may eliminate one or more paychecks at the end of their tenure. In some situations, the employer may end up bearing the cost of the taxes as a practical matter.
- It is unclear whether an employer can use the deferral with respect to some groups of qualifying employees, but not others, where that may be desirable for payroll administration or other reasons.
- It is unclear how overtime pay or other variable pay, such as commissions and bonuses, should be taken into account in calculating the $4,000 threshold. It appears that base pay or wages may be the proper metric in most cases, but further elaboration by Treasury is needed.