On August 8, 2020, President Trump issued a series of executive orders intended to assist Americans with financial relief during the ongoing COVID-19 pandemic crisis. Frustrated with the inability of Congress to pass new legislation, the president took matters into his own hands and directed government agencies to take action immediately. Specifically, he directed the IRS to defer collecting payroll taxes (e.g. FICA, social security and Medicare taxes) from September 1, 2020 until the end of the year. This “payroll tax holiday” is intended to leave more money in the pockets of Americans so they can get by in these difficult times.
However, this executive order (unsupported by any act of Congress) leaves many questions. Does the “deferment” mean that the taxes will have to be paid in the future? Do all employers have to participate? Will there be penalties and interest on the deferred taxes?
The relevant sections of President Trump’s executive order are as follows:
- “Section1. Policy. The 2019 novel coronavirus (COVID-19) that originated in the People’s Republic of China has caused significant, sudden, and unexpected disruptions to the American economy. On March 13, 2020, I determined that the COVID-19 pandemic is of sufficient severity and magnitude to warrant an emergency declaration under section 501(b) of the Robert T. Stafford Disaster Relief and Emergency Assistance Act, 42 U.S.C. 5121-5207, and that is still the case today. American workers have been particularly hard hit by this ongoing disaster. While the Department of the Treasury has already undertaken historic efforts to alleviate the hardships of our citizens, it is clear that further temporary relief is necessary to support working Americans during these challenging times. To that end, today I am directing the Secretary of the Treasury to use his authority to defer certain payroll tax obligations with respect to the American workers most in need. This modest, targeted action will put money directly in the pockets of American workers and generate additional incentives for work and employment, right when the money is needed most.”
- “Sec. 2. Deferring Certain Payroll Tax Obligations. The Secretary of the Treasury is hereby directed to use his authority pursuant to 26 U.S.C. 7508A to defer the withholding, deposit, and payment of the tax imposed by 26 U.S.C. 3101(a), and so much of the tax imposed by 26 U.S.C. 3201 as is attributable to the rate in effect under 26 U.S.C. 3101(a), on wages or compensation, as applicable, paid during the period of September 1, 2020, through December 31, 2020, subject to the following conditions:”
- (a) The deferral shall be made available with respect to any employee the amount of whose wages or compensation, as applicable, payable during any bi-weekly pay period generally is less than $4,000, calculated on a pre-tax basis, or the equivalent amount with respect to other pay periods.
- (b) Amounts deferred pursuant to the implementation of this memorandum shall be deferred without any penalties, interest, additional amount, or addition to the tax.
- “Sec. 3. Authorizing Guidance. The Secretary of the Treasury shall issue guidance to implement this memorandum.”
- “Sec. 4. Tax Forgiveness. The Secretary of the Treasury shall explore avenues, including legislation, to eliminate the obligation to pay the taxes deferred pursuant to the implementation of this memorandum.”
The deferral does not apply to any taxpayer that earns more than $104,000.00 per year in wages or compensation. While the IRS is directed to defer on collecting the taxes, the executive order does not have the force of law to compel employers not to collect the taxes or remit them to the Internal Revenue Service. In fact, there is no enforcement mechanism that can compel employers to participate and not withhold taxes.
Why wouldn’t employers want to participate? Keep in mind that the executive order only offers a tax “deferment”, not tax “forgiveness”. While the president directed that “[t]he The Secretary of the Treasury shall explore avenues, including legislation, to eliminate the obligation to pay the taxes deferred”, the problem is that only the U.S. Congress has the authority to propose and pass a bill that would actually forgive the taxes. Absent an act by the legislative branch, the payroll taxes owed will become due and payable after the deferral period has ended.
On August 28, 2020, the IRS released Notice 2020-65 that attempted to provide some official guidance for the “payroll tax holiday”. This very brief notice states the following:
- “On August 8, 2020, the President of the United States issued a Presidential Memorandum directing the Secretary of the Treasury (Secretary) to use his authority pursuant to section 7508A of the Internal Revenue Code (Code) to defer the withholding, deposit, and payment of certain payroll tax obligations. Accordingly, the Secretary has determined that employers that are required to withhold and pay the employee share of social security tax under section 3102(a) or the railroad retirement tax equivalent under section 3202(a) are affected by the COVID-19 emergency for purposes of the relief described in the Presidential Memorandum and this notice (Affected Taxpayers). For Affected Taxpayers, the due date for the withholding and payment of the tax imposed by section 3101(a), and so much of the tax imposed by section 3201 as is attributable to the rate in effect under section 3101(a), on Applicable Wages, as defined herein, (collectively Applicable Taxes) is postponed until the period beginning on January 1, 2021, and ending on April 30, 2021. (The deposit obligation for employee social security tax does not arise until the tax is withheld. Accordingly, by postponing the time for withholding the employee social security tax, the deposit obligation is delayed by operation of the regulations. Thus, this notice does not separately postpone the deposit obligation).”
- APPLICABLE WAGES: “For purposes of this notice, Applicable Wages means wages as defined in section 3121(a) or compensation as defined in section 3231(e) paid to an employee on a pay date during the period beginning on September 1, 2020, and ending on December 31, 2020, but only if the amount of such wages or compensation paid for a bi-weekly pay period is less than the threshold amount of $4,000, or the equivalent threshold amount with respect to other pay periods. (Because Applicable Wages are defined as wages as defined in section 3121(a) and compensation as defined in section 3231(e), any amounts excluded from wages or compensation under these sections are not included when determining Applicable Wages). The determination of Applicable Wages is made on a pay period-by-pay period basis. If the amount of wages or compensation payable to an employee for a pay period is less than the corresponding pay period threshold amount, then that amount is considered Applicable Wages for the pay period, and the relief provided in this notice applies to those wages or that compensation paid to that employee for that pay period, irrespective of the amount of wages or compensation paid to the employee for other pay periods.”
- PAYMENT OF DEFERRED APPLICABLE TAXES: “An Affected Taxpayer must withhold and pay the total Applicable Taxes that the Affected Taxpayer deferred under this notice ratably from wages and compensation paid between January 1, 2021 and April 30, 2021 or interest, penalties, and additions to tax will begin to accrue on May 1, 2021, with respect to any unpaid Applicable Taxes. If necessary, the Affected Taxpayer may make arrangements to otherwise collect the total Applicable Taxes from the employee.”
The Internal Revenue Service directs that employers may suspend the collection and remittance of payroll taxes (specifically FICA taxes for social security and Medicare) between Sept. 1, 2020 and Dec. 31, 2020, meaning that the employee will retain that money and have a much larger paycheck. Since the employer is responsible for remitting payroll taxes, then it appears to be solely the employer’s decision whether or not to suspend collection of taxes. There are no penalties for non-compliance with this order.
However, if taxes were not paid in 2020, the IRS makes it clear that the employer is responsible for repaying the deferred taxes during the first four months of 2021 (Jan 1, 2021 through April 30, 2021). If the taxes are not repaid by April 30, 2021, then there will be penalties and interest due. For the employee (if his or her taxes were deferred), this means that DOUBLE the FICA, social security and Medicare taxes will come out of each paycheck for the first one-third of 2021. This can be a shocking reduction that comes at a horrible time. Keep in mind that the tax deferral comes ahead of the Christmas season, meaning that many people will be spending these funds on additional or more lavish gifts. However, when the holidays end and the focus changes to financial recovery, the severe reduction in income during the first part of the new year can be devastating to the budget. Deferral is NOT the same as forgiveness and Uncle Sam expects to be paid in full in short order.
Of course, President Trump hopes and encourages that the federal government will take steps to actually forgive the taxes that were deferred, but this can only be accomplished by an act of Congress. At present, there seems to be little movement or momentum to suggest these deferred taxes will be forgiven before the end of the year. This means that taxpayers should treat this “payroll tax holiday” as a short-term loan with no interest due provided that it is repaid by April 30, 2021. Many tax professionals actually recommend that employers do NOT suspend payroll tax collection because employees will not likely appreciate the repayment provisions in 2021.
If you have any questions about federal taxation or need legal representation, then do not hesitate to contact the experienced attorneys at Kershaw, Vititoe & Jedinak PLC for assistance today.