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President's Memorandum on Deferring Payroll Tax Obligations

Posted by Zinner & Co. Tax Team on Aug 15, 2020 4:30:00 PM
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A.K.A. Executive Order – Payroll Tax Holiday

On Aug. 8, President Trump issued a number of Executive Orders to address the fact Congress was unable to come to an agreement to provide additional stimulus to the economy, which continues to lag during the prolonged COVID-19 pandemic.

The “Memorandum on Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster,” which many people refer to as the “Payroll Tax Holiday” order, was issued to provide additional economic relief to workers.

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Please note, the President’s authority to issue this Executive Order falls under Code Section 7508A, which allows only for the delay in payments or other actions in response to a disaster declaration. This was the same authority under which the payment of taxes and filing of tax returns for the 2019 tax year were previously delayed until July 15, 2020.

While the President indicated he ultimately wants payroll taxes abated, the reality of our governmental system actually requires an act of Congress to make this change. In the meantime, the U.S. Treasury Department was ordered to provide guidance on the current Executive Order. We are hopeful this guidance will provide logistical guidance on what this means to both employers and employees.

Here is what we know:

  • Beginning on Sept. 1 and continuing through Dec. 31, 2020, there are three components of the payroll tax deferral including (1) the deferral of the withholding, (2) the deposit, and (3) the payment of the employee’s share of FICA taxes (6.2 percent under the Federal Insurance Contributions Act). This will be effective for employees, who earn bi-weekly, pre-tax earnings of less than $4,000 (roughly an annual salary of $104,000) or a similar amount, where a different pay period applies. The goal of this Order is to allow greater cash flow to pass to wage earners, thereby giving them additional cash flow for spending. That being said, this Order truly only affects those workers currently employed, but provides no additional assistance to those who remain unemployed. This is the main reason both Congressional Democrats and Republicans have not been in favor of a payroll tax holiday.
  • For employers, there are still many unanswered questions. It remains unclear as to whether employers have the option, or the requirement, to complete all three steps of the Executive Order – withhold, deposit and payment of FICA tax. Until guidance is provided, employers could in theory, continue to withhold FICA tax and wait to deposit and pay the tax until sometime in 2021, thereby negating the intended additional cash flow for workers and the stimulus effect on the economy. It is also unclear how employers should attempt to implement these deferrals in the case employees terminate employment between Sept. 1 and Dec. 31. Under these circumstances, the employer would not have the ability to recover FICA taxes they will be required to pay on behalf of someone they no longer employ.

What to do now?

We recommend waiting for additional guidance from the U.S. Treasury before taking any action to change employee deferrals. While it is not guaranteed, due to the fast approaching implementation date of the Executive Order, we are hopeful this guidance will be forthcoming in the next two weeks.

We will continue to update you as additional information becomes available.

Topics: Coronavirus, COVID-19, Deferring Tax Payments

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