On August 8, 2020, President Donald Trump signed an executive order directing the U.S. Treasury Department to defer the withholding, deposit, and payment of certain employment taxes that would otherwise be withheld and remitted to the IRS. Because the order only defers the taxes at issue, employers that do not withhold the taxes covered by the order may ultimately be required to pay those taxes from their own funds. In addition, the executive order leaves open questions about how it will be implemented.
The executive order’s scope is narrow. It defers the collection of the employee’s share of Social Security taxes (imposed at a rate of 6.2%) and an equivalent amount of an employee’s Railroad Retirement taxes, in each case for wages paid from September 1, 2020 through December 31, 2020, and only for employees whose wages or compensation, as applicable, payable during any bi-weekly pay period generally is less than $4,000. That works out to about $104,000 per year, but as indicated below, there are open questions on how the limit is calculated. The executive order does not apply to income taxes, the employee’s 1.45% Medicare tax (or the Railroad Retirement Tax Act equivalent), or the employer’s share of Social Security or Medicare taxes.
The executive order could put employers in a difficult position. Employees qualifying for the deferral will expect their employers to stop withholding Social Security taxes and will therefore expect an increase in their take home pay. Under current law, however, employers will remain liable for the Social Security taxes that are not collected from employees. Thus, because the employees’ Social Security taxes are only being deferred, employers will have to find a way to pay such taxes when the deferral expires, which will presumably be on January 1, 2021. If the employee from whom Social Security taxes were not collected is no longer employed by the employer after December 31, 2020, the employer may be left with no means of collecting the deferred taxes and may be required to pay such taxes with its own funds. Many employers may prefer to continue to withhold their employees’ Social Security taxes, to ensure that there is a means to pay the tax if and when the deferral period expires.
The executive order leaves open questions that will have to be answered through Treasury Department guidance. Questions that will require answers from the Treasury Department include:
- Whether employers may elect out of the tax deferral and continue to withhold and remit the Social Security taxes of all of their employees.
- The executive order applies to employees whose “wages or compensation, as applicable, payable during any bi-weekly pay period generally is less than $4,000 [emphasis supplied].” The Treasury Department will have to clarify when an employee’s bi-weekly pay is generally less than $4,000. Among other things, the Treasury Department should specify:
- If an employee currently earns slightly more than $4,000 per bi-weekly pay period, whether the employee’s wages can be adjusted downward so that the employee’s wages are below the limit.
- If an employee has more than one job, will all of the employee’s wages be applied towards the eligibility limit, and how will employers learn about and take into account wages from the other job(s).
- The executive order provides that the taxes at issue “shall be deferred without any penalties, interest, additional amount, or addition to the tax.” The Treasury Department should specify the scope of the penalty relief, including whether employers will be given time after December 31, 2020 to pay the deferred taxes.
There are some questions that the Treasury Department may not be able to answer. Some commentators have questioned whether the President had the authority to issue the executive order, and it is unclear that the relief offered by the executive order would be respected if there were to be a change in administration. The question of whether the executive order is enforceable by taxpayers is beyond the scope of this client advisory.
Kelley Drye is monitoring developments related to the executive order and expects to issue periodic updates to this client advisory as more information becomes available.