On August 8, 2020, President Trump signed a Memorandum on Deferring Payroll Tax Obligations in Light of Ongoing COVID-19 Disaster for the Secretary of the Treasury (the “Payroll Tax Memo”). The Payroll Tax Memo notes that President Trump previously declared the COVID-19 pandemic an emergency and that further action is needed to support working Americans during the pandemic. The Payroll Tax Memo directs the Secretary of the Treasury to use his authority (under Section 7508A of the Internal Revenue Code) to defer withholding, deposit, and payment of certain Federal Insurance Contribution Act or “FICA” taxes owed by certain employees for wages paid between September 1, 2020 and December 31, 2020 (the “Deferral Period”), subject to the following conditions:
- The deferral is only permitted for employees whose bi-weekly pre-tax compensation is less than $4,000 (or the equivalent amount with respect to other regular pay periods); and
- Amounts deferred shall be deferred without any penalties, interest, additional amount or addition to the tax.
Normally, employers and employees must each pay 6.2% on wages paid each year up to the FICA wage base (which is $137,500 for 2020) (this total of 12.4% is for Social Security) plus 1.45% each on all wages paid each year (this total of 2.9% is for Medicare). High-income employees must pay an additional Medicare tax equal to 0.9% on all wages paid in excess of $200,000 for single tax filers, or $250,000 for married couples filing jointly, or $125,000 for married couples filing separately. Pursuant to the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), discussed in greater detail in a previous post, employers have been permitted to defer the 6.2% employer portion of the Social Security tax for wages paid during the period between March 27, 2020 and December 31, 2020, with 50% of such amount due by December 31, 2021, and the remaining 50% due by December 31, 2022.
The FICA taxes that may be deferred by employees pursuant to the Payroll Tax Memo equal the 6.2% for Social Security taxes payable by the employee for wages paid during the Deferral Period (the “Deferred FICA Taxes”). Overall, for employees making $4,000 per bi-weekly pay period, this deferral would decrease the taxes withheld by about $248 per paycheck (for a total of up to around $1,984 of Deferred FICA Taxes per employee during the Deferral Period). The Payroll Tax Memo directs the Secretary of the Treasury to issue guidance and to explore all potential avenues to eliminate the obligation to pay the Deferred FICA Taxes—acknowledging that the deferral in the Payroll Tax Memo itself does not eliminate the taxes and that, without further action, such taxes must be paid at some point in the future.
The Payroll Tax Memo does not make clear whether the deferral is mandatory or something that can be elected. If it can be elected, is it the employer or the employee who gets to decide whether to defer taxes? For the deferral permitted for employers pursuant to the CARES Act, it was clear that deferral was voluntary at the election of the employer.
The Payroll Tax Memo also does not address what happens when the Deferral Period ends. Employers are required normally to withhold the employee portion of FICA taxes and remit them on the employees’ behalf to the government. When the Deferral Period ends, does the employer need to withhold the Deferred FICA Taxes from other wages paid to the employee? If the employer does not need to withhold such amount, would the employee be required to pay an amount equal to the Deferred FICA Taxes as part of his or her 2020 federal tax return filed in early 2021? If Congress takes action to forgive the Deferred FICA Taxes that are owed, would the forgiven amounts constitute additional income for which such employees would need to pay additional income tax?
Given the uncertainty that remains with respect to the deferral, we would not recommend that employers take steps yet to actually implement the deferral. However, given the limited amount of time prior to the beginning of the Deferral Period, employers may want to begin identifying the employees who could qualify for the deferral and to determine what systematic, administrative changes might be necessary to implement such a deferral. It is not clear how quickly the Department of the Treasury will issue guidance, but we hope that at least initial guidance will be issued clarifying some of the key questions described above prior to the beginning of the Deferral Period on September 1, 2020, to assist employers in deciding whether and how to implement the deferral.