President Trump issued an executive memorandum on August 8 to defer the employee's portion of Social Security tax obligations for many workers. The deferral will last from September 1, 2020, through December 31, 2020.
What, if anything, should employers do to comply with the order by the September 1 deadline? The answer depends on impending guidance from the U.S. Department of Treasury.
Background on Stalled Legislative Relief
On March 27, 2020, President Trump signed into law the Coronavirus, Aid, Relief and Economic Security (CARES) Act. It allows employers to defer paying their portion of Social Security taxes through December 31, 2020. All 2020 deferred amounts under the CARES Act are due in two equal installments: one at the end of 2021 and the other at the end of 2022. Employers that took a Paycheck Protection Program (PPP) loan may also defer payment of these taxes.
As the COVID-19 pandemic continues to surge, Congress has been working out the details for an additional round of financial relief to help American workers and businesses. Two bills have been introduced as starting points for bipartisan negotiations: The House passed the Health and Economic Recovery Omnibus Emergency Solutions (HEROES) Act on May 15, and Senate Republicans proposed the Health, Economic Assistance, Liability Protection and Schools (HEALS) Act on July 27.
Congressional negotiations broke down, and as a result, President Trump issued four executive actions designed to provide temporary economic relief during the pandemic, including deferring the employee's portion of Social Security tax obligations for certain workers.
Some legislators have questioned the legality of President Trump's orders. But it's uncertain whether they'll face legal action — and whether they'll reignite Congressional negotiations and ultimately lead to bipartisan legislation.
Close-Up on the Payroll Tax Deferral
There are many questions about the practicalities of the payroll tax deferral. Under current law, employees must pay the OASDI (Old Age, Survivors and Disability Income) portion of FICA tax at a rate of 6.2% on amounts up to the annual "wage base," which is adjusted for inflation. The inflation-adjusted wage base is $137,700 for 2020.
The executive action defers the withholding, deposit and payment of the employee's share of the OASDI portion of FICA tax imposed on wages or compensation paid September 1, 2020, through December 31, 2020.
Important: This appears to mean that applicable taxes on wages earned during the last two weeks of August and paid the first week of September would be subject to the deferral.
The deferral applies to any employee with biweekly wages or compensation of less than $4,000 (or the equivalent of $104,000 annually) calculated on a pretax basis. These amounts will be deferred without any penalties, interest, additional amount or addition to the tax.
The executive action doesn't provide any other details. Instead, it directs the Secretary of the U.S. Treasury, Steven Mnuchin, to issue implementation guidance and to "explore avenues, including legislation, to eliminate the obligation to pay the deferred taxes."
At this point, it's unclear whether employees will need to opt into the withholding tax deferral as employers do under the CARES Act. It's also unclear when the deferred amounts must be repaid and whether the deferral applies to self-employed individuals. President Trump has said that if he's re-elected, he'll find a way to eliminate the obligation that employees repay the deferred amounts — and it's still possible that Congress will pass legislation that would eliminate the employee's obligation to repay those amounts.
There are many legal questions surrounding the executive memorandum and the lack of any current guidance from the U.S. Treasury make it impossible to implement at this time.
Will the deferred withholding be paid back by the employer through additional withholding from the employees, or will the employee have to pay it back through their 2020 individual federal income tax returns when they file in the spring of 2020 after they have already spent the money?
This deferral is ripe for problems for both the employee and employer, and our recommendation is to continue withholding and not defer. Please contact us with any questions.