President Trump’s Memorandum on Deferring Payroll Tax Obligations

Update

On August 28, 2020, the Internal Revenue Service released Notice 2020-65 to provide guidance for employers who decide to participate in deferral of withholding and deposit of the 6.2 percent employee portion of Social Security Tax under President Trump’s Memorandum dated August 8, 2020.

Notice 2020-65 confirms that participating employers will be required to deposit the entirety of previously deferred withholding during the period beginning January 1, 2021, and ending on April 30, 2021. Interest, penalties, and additions to unpaid tax shall begin to accrue on May 1, 2021.

Social Security Tax Deferral for Employees in Response to COVID-19

On August 8, 2020, President Trump issued a memorandum instructing Treasury Secretary Mnuchin to defer withholding, deposit, and payment of what is commonly referred to as the Social Security Tax employees are required to pay pursuant to Code Sec. 3101(a). Ordinarily, this 6.2 percent tax is deducted automatically from employees’ wages by the employer, who is then responsible for depositing the tax with the Treasury. The penalty and interest free deferral is “available” to any employee earning less than 4,000 dollars in a bi-weekly period during the time frame beginning September 1, 2020, through December 31, 2020.

Payroll Tax Deferral Considerations for Employers

When the memorandum was released, employers everywhere were faced with the task of trying to decipher exactly what the President’s use of the term “available” meant. Was participation in the deferral optional, or was it required? On August 12, 2020, Secretary Mnuchin affirmed that participation was optional, stating “We can’t force people [employers] to participate, but I think many small businesses will and pass on the benefits.”

It is important to understand that the tax liability is “deferred,” not forgiven. While the Executive branch can defer a tax, only Congress can forgive it. Secretary Mnuchin acknowledged this fact while asserting that the Administration intended to seek approval from Congress to forgive the deferred tax liability. However, requesting forgiveness does not equate to receiving forgiveness and employers must give this uncertainly serious consideration.

For employers considering participation in the deferral, questions remain about how deferring the tax would be rolled out and how it would ultimately be recovered absent forgiveness from Congress. Employers are obligated to withhold and remit the tax on behalf of the employee, essentially acting as a pass-through agent for the employee to the Treasury. Under current law, employers are also liable for any unremitted payroll taxes. Employers may have little choice but to increase the withholding in an amount enough to cover their obligation as the withholding agent. While the deferral would provide employees with increased cash flow through December 31, 2020, their cash flow would certainly be impaired as increased withholding kicked in at the end of the deferral period.

Social Security Tax Deferral Guidance

Guidance intended to address the many important questions on implementation is expected to be forthcoming from the Department of Treasury, but we do not know when that guidance will be available. Until that guidance is issued, employers and their advisors are standing by, unable to make an informed decision appropriate for their business and for their employees.

If you have questions about this development or other business matters related to COVID-19, please reach out to your Keiter Opportunity Advisor or Email | Call: 804.747.0000. We are here to help.

Additional Resources

Sources

• “Presidential Executive Order Defers Employee Social Security Taxes” | RIA Checkpoint
• “Employers Cast Wary Eye on Trump Payroll – Tax Deferral”  | Wall Street Journal