On August 8, 2020, President Trump signed an executive order directing the Secretary of the Treasury (the “Secretary”) to defer the withholding, deposit, and payment of certain payroll tax obligations on wages or compensation paid during the period of September 1, 2020 through December 31, 2020. The deferral would apply to the employee portion of the old-age, survivors and disability insurance (“OASDI”) tax under Internal Revenue Code (“IRC”) Section 3101(a) and Railroad Retirement Act Tier I tax under IRC Section 3201 with respect to any employee whose wages or compensation is less than $4,000, calculated on pretax basis, during any biweekly pay period. Such obligations would be deferred without any penalties, interest, or additional tax.
Though President Trump has maintained that he hopes such payroll tax obligations will be waived, i.e., a payroll tax holiday, there is no legal authority for the president to waive or otherwise forgive such payroll taxes unilaterally. As such, the Secretary is permitted, at President Trump’s direction, to defer the collection of payroll taxes pursuant to IRC 7508A related to the deferral of tax collections due to an emergency declaration under the Robert T. Stafford Disaster Relief and Emergency Act. This means that, though taxpayers will not be legally required to remit the applicable payroll taxes to the IRS beginning in September of 2020, such taxes will still be owed to the government and will be due January 1, 2021 after the deferral period is over. Any reduction or elimination of such payroll tax obligation will require an act of Congress.
As it is clear that the executive order only defers payroll tax obligations, employers under an obligation to withhold and remit such taxes to the Internal Revenue Service will be required to account for such payroll taxes that will be due at the end of the deferral period. Additionally, employers will need to ensure that they have sufficient cash on hand at the end of the year to make payments of the deferred payroll tax amounts. Considering these issues, Treasury Secretary Mnuchin clarified on August 12, 2020 that employers are not obligated to defer withholding and remittance of such taxes, and that participation in the deferral is entirely optional.
The Treasury Department is supposed to issue guidance as to how the payroll tax suspension may work. Moreover, the issue could become moot if congressional leaders are able to pass legislation that provides relief negating the need for the payroll tax deferral, as President Trump signed the executive order in response to the breakdown in legislative negotiations last week. It should be noted, however, that congressional leaders from both parties have indicated that they are averse to the idea of a payroll tax holiday, and do not plan on passing any legislation providing for one.
The CARES Act already provided for the deferral of the employer’s share of such taxes for the period of March 27, 2020 through December 31, 2020. Those deferred amounts are due over the course of the next couple of years with 50 percent of such deferred taxes due by December 31, 2021 and the balance due by December 31, 2022.
Taxpayers should consult with their FGMK tax and accounting advisors before taking any actions related to the executive order.
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