On August 8, 2020, President Trump announced four executive actions intended to provide certain targeted relief for enhanced unemployment payments, eviction moratoriums, student loan payment relief and employee payroll taxes while negotiations continue in Congress for the next round of stimulus/aid in response to the COVID-19 pandemic. This summary focuses on the Presidential Memorandum directing the Treasury Secretary to permit the deferral of certain employee payroll tax obligations and the implementing guidance, Notice 2020-65, issued by the Treasury Department and Internal Revenue Service on Friday, August 28, 2020.
Employers and employees alike should be aware of the following aspects of this “deferral program” targeted for working Americans:
- Deferral Applies Only to Employee Social Security Tax (6.2% of wages). Although the announcement of the Presidential Memorandum refers to the deferral of “payroll tax” generally, the actual deferral only applies to the employee’s portion of the Social Security tax imposed under the Federal Insurance Contributions Act (“FICA”). The Social Security tax imposed on employees is 6.2% of wages. FICA also imposes a second tax on employees known as the hospital insurance (Medicare) tax equaling 1.45% of wages. The Presidential Memorandum does not defer or otherwise change the hospital insurance (Medicare) tax.
Meanwhile, FICA imposes the same 6.2% Social Security tax and 1.45% hospital insurance (Medicare) tax on employers based on wages paid to employees (often called the employer’s share of FICA). The Presidential Memorandum does not affect an employer’s FICA obligations, but please note that the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) previously provided employers with the opportunity to defer deposits and payments of the employer portion of the Social Security tax.
- Applies to All Employers. The Presidential Memorandum does not contain any exceptions or exclusions. Thus, it applies to any organization paying wages that are subject to the Social Security tax under FICA (or the Railroad Retirement Tax Act).
- The Deferral is Voluntary; Employers Decide. The Notice “allows” employers to defer withholding and payment of the tax, which is consistent with informal comments from Treasury Secretary Mnuchin that employers cannot be forced to implement this deferral program. The Notice also indicates in a footnote that it only delays the timing for withholding the tax, and that once the tax is withheld from wages the normal deposit rules apply (meaning that an employer can’t withhold the tax from employee wages and keep those funds for the benefit of the employer). Moreover, the Notice does not provide any rights or a mechanism for an employee to opt-in or opt-out of the deferral program. Consequently, the employer can decide whether or not to implement the deferral program in its sole discretion.
- Deferral Period From 09-01-2020 to 12-31-2020. The deferral program applies to wages or compensation paid during the period of September 1, 2020, through December 31, 2020.
- Limited to Employees with Gross Wages Below $4,000 Per Pay Period. The deferral program is to be available for any employee who has less than $4,000 of gross wages during any bi-weekly pay period, or the equivalent amount with respect to other pay periods (generally, any employee whose annualized pre-tax wages is less than $104,000).
- Employee Eligibility is Based on Each Pay Period. The Notice addresses issues about the effects of bonuses and other irregular compensation by providing that eligibility should be determined on a pay period-by-pay period basis with respect to the $4,000 threshold. In other words, an employer would need to monitor an employee’s wages each pay period to determine whether or not Social Security taxes can be deferred for that particular pay period.
- Tax is to be Withheld and Repaid Ratably from January 1, 2021 to April 30, 2021. Significant questions arose from the Presidential Memorandum concerning how and when the deferred taxes would need to be paid. The Notice provides that the employer must withhold such amounts “ratably from wages and compensation paid between January 1, 2021 and April 30, 2021 . . . .” Thus, employees would experience a tax increase during the first four (4) months of 2021, unless Congress takes action in the next stimulus/relief bill to forgive this tax obligation.
- Employers are Subject to Interest, Penalties and Additions to Tax for Unpaid Amounts. The Notice indicates that interest, penalties and additions to tax will begin to accrue on and after May 1, 2021, with respect to any deferred Social Security taxes that have not been repaid by April 30, 2021.
- Employer Liability Exists for Departed Employees. The Notice also states that the employer “may make arrangements to otherwise collect the total Applicable Taxes from the employee.” This appears to address concerns about potential situations where employment terminates prior to April 30, 2021. It signals that an employer should plan to withhold any remaining deferred Social Security taxes prior to the employee’s departure.
- Prospects for Congressional Action to Forgive Deferred Amounts. The House Ways and Means Committee’s top Republican recently indicated that he would like to introduce legislation to forgive the deferred payroll taxes and use money from the federal government’s general fund to cover the Social Security revenue that would be otherwise lost. However, Senate Democrats are hoping to overturn the payroll tax deferral altogether, including looking into the option of invalidating the President’s Executive Action under the Congressional Review Act. Given these divergent views, it seems unlikely that Congress would act to forgive the deferred taxes unless such forgiveness is part of a larger compromise for additional stimulus/aid.
We would caution against implementing the deferral program because of the numerous challenges/risks involved. For example, employers will be challenged to accurately implement the necessary payroll changes in an extremely short timeline, employees would face a significant financial burden at the beginning of 2021 and employers would incur liability if the deferred taxes are not timely repaid. Nonetheless, if you are an employer interested in moving forward with the deferral program, we recommend, at minimum, establishing a detailed implementation plan and communicating clearly with employees about the implications.
If you have any questions or need assistance with the deferral program, please feel free to contact:
- Calvin Chambers at (317) 977-1459 or cchambers@hallrender.com;
- Kelci Laster at (317) 977-1401 or klaster@hallrender.com; or
- Your regular Hall Render attorney.
Hall Render blog posts and articles are intended for informational purposes only. For ethical reasons, Hall Render attorneys cannot—outside of an attorney-client relationship—answer specific questions that would be legal advice.
