Executive Action on Payroll Tax Deferral Raises More Questions Than it Answers

In a memorandum issued on August 8, President Trump announced a program to allow employers to defer withholding and payment of the employee portion of Social Security taxes that would otherwise be required to be withheld from paychecks and deposited with the IRS between September 1 and December 31, 2020. The President’s action, however, is not as expansive as some reports suggest, and between the limited ambition of the program and the uncertainty regarding its implementation, businesses should think carefully about whether and to what extent they want to take advantage of the program.

Many news reports describe the President as having issued an executive order suspending the payment of Social Security taxes. That is a significant, and potentially costly, oversimplification. First, the action was not in the form of an executive order at all—by its terms, it is simply a “presidential memorandum,” outlining the President’s enforcement priorities and political preferences. The legal effect of the memorandum is not immediately clear. It directs the Treasury Department to develop guidance regarding how to implement the President’s program; at a minimum, any businesses wishing to take advantage of the deferral should wait until formal guidance has been published by Treasury before making any decisions. Secondly, it is worth noting that there are live issues regarding whether the President has the constitutional authority to suspend collection of tax at all, whether by executive order, presidential memorandum or otherwise. There likely will be litigation surrounding this program, and it is unlikely to be finally resolved within the next few months. This again emphasizes that any business that does not continue collecting and paying payroll taxes as usual will be doing so at its own risk. Finally, it is worth noting that although the broad contours of the guidance are fairly straightforward, there are some details that will be difficult to implement; in particular, the relief only applies to payments to employees whose biweekly pay is generally less than $4,000 before tax. Businesses will need to know how to apply that rule to employees whose pay period is not biweekly, employees whose income is variable or has recently increased or decreased significantly and so forth. Even if the Treasury Department offers clear and timely guidance on these questions, reprogramming payroll software to distinguish between eligible and ineligible employees likely will be at least somewhat complicated.

Most importantly, however, everyone considering the impact of the President’s announcement on their situation should be aware that even by its terms, the presidential memorandum does not actually relieve employers of the obligation to withhold and pay this tax—they merely have a brief extension of the normal time for depositing it with the IRS. In January, under current law, employers will owe the full amount of Social Security taxes they would normally have collected from employees and deposited with the IRS from September through December. The President’s action should be seen as (at most) a three-month extension, not as relieving taxpayers of the obligation to pay the tax. Again, the reporting on this has been somewhat unclear; the President has said that he hopes to negotiate a package of tax and stimulus programs with Congress, and the memorandum stresses the President’s hope that any such package will include a provision forgiving the amount of withholding that normally would have been collected during this period. But there is very little indication that Congress will take up major tax legislation between now and November, and there is even less indication that Congress would accept a bill forgiving a quarter’s worth of Social Security withholding.

Of course, this leaves businesses in a difficult position. The President has announced that he will develop and implement rules deferring the collection of the employee’s portion of Social Security tax, and that businesses should expect the amount of tax that should have been collected to be forgiven. It is not at all clear that the forgiveness will ever become law, but it is also not clear that such forgiveness would apply to companies that continued to withhold these taxes through the end of the year.

At this juncture we believe it is best to await further developments from the Treasury Department. Depending on what that guidance eventually says, employers would be well served to continue withholding and depositing payroll taxes as normal, or, at most, starting with wages paid in September, to continue to collect the amount that is required to be withheld from employees, and then hold it in a low risk investment vehicle until January, at which point if a new law has relieved them of the obligation to pay it they will be able to return it to employees. If there has been no change in the law, employers at least will be able to keep whatever interest has been earned over that period. Not withholding the funds from employees’ paychecks for the last quarter of 2020 could be a very costly mistake.

If you have questions, please contact Dan Pittman. Our office is trying as best we can to work remotely, while continuing to timely and effectively respond to, and anticipate, client concerns.