After failing to find a compromise on a new stimulus package by the self-imposed deadline of August 7th, 2020, President Trump issued a new executive order on Saturday August 8th that would defer the withholding of employee payroll taxes. The executive order presents many immediate questions and challenges for employers and it is also likely to face several political challenges over the next few weeks. Given the potential political hurdles and the many potential obstacles a deferment without forgiveness would create, it is very possible that this ultimately may not be implemented. The deferral is scheduled to be effective for the period of September 1, 2020 to December 31, 2020, giving a little bit (but not a lot) of time for more information to come out prior to employers having to act. There are no immediate action points for anyone right now but they should be on the horizon and coming soon.
Background on the Executive Order
While congress traditionally has the “power of the purse” which allows them to set tax law, the declaration of a nationwide disaster under the Stafford Act allows the treasury secretary to use the authority under Section 7508A to delay tax actions for up to one year. This section was used to move the 2019 tax filing deadline from April15, 2020 to July 15, 2020.
It is important to once again note that this section only gives the right to move certain payments and deadlines and not outright eliminate taxes. As such, absent any congressional action, the tax would still be due. The executive order defers the Old-Age, Survivors and Disability Insurance (OASDI or FICA) tax due from employees of 6.2%.
Like with other COVID-19 related actions the “law” may be in place however there is limited precedent to help implement and no regulations issued yet. The executive order calls for the treasury secretary to issue regulations related to this deferral; until these regulations are issued there is very little else known right now.
Impact on Employees
A payroll tax cut has been among President Trump’s goals for providing relief related to the COVID-19 pandemic; this executive order does not cut payroll taxes but for employees may provide temporary relief. Under the deferral, employees would ultimately still have to pay these taxes at some point in the future, absent congressional action. The order indicates there will be an exploration of ways to eliminate the obligation, however, that is not assured. Employees should be wary of spending this “stimulus” until their potential repayment obligation is better understood.
For employees making less than $100,000 per year, the deferral would increase their take home pay by 6.2% per paycheck from September 1st through the end of the year. The order indicates this is determined on a per payroll basis (meaning any paycheck that is less than $4,000 per bi-weekly payroll) is eligible for this deferral.
Impact on Employers
Under IRS Tax Code, employers are required to withhold taxes at the source on employee wages, including both income tax withholding and FICA taxes. FICA taxes are also considered “trust fund” taxes, which ultimately place a personal responsibility for the collection and payment of these taxes on owners, officers, and directors. Given this level of exposure, many employers are immediately concerned regarding their potential risk and personal risk for nonpayment or withholding of this tax. This concern has led to some employers and advisors contemplating forgoing the deferral (e.g. still withholding and remitting the tax) but its uncertain if that is possible; it is likely that will not be an option. Many states have laws that only allow for certain items to be withheld from employees checks and this could create a legal scenario for the employer should they decide to continue to withhold. Employers should be concerned about their liability exposure but until guidance is issued, there is not much to be done.
Right now, until regulations are released, interpreted, and implemented, there are very few action items for employees and employers. The deferral is not effective until September 1, 2020 meaning we should expect a lot of new information in the coming weeks. It will be important that employers understand and communicate with their payroll processor how this deferral will be implemented as the guidance comes out and to understand what their obligations are under the issued regulations. Employees will see an increase in take-home pay, but if this deferral is not eliminated, it could result in a massive tax bill down the line. Finally, the current political environment makes it entirely possible that this proposed deferral is never ultimately implemented, either due to a legal or constitutional challenge or it being superseded by a new stimulus bill. The next few weeks will be interesting for sure and as more information becomes available, we will share accordingly.
Edward McWilliams, CPA
Ed is a Partner in the firm’s tax and business advisory practice focusing on providing services to middle market private companies across different industries as well as to early stage startups. Ed has over a decade of experience providing tax and business consulting services to these companies of different sizes and across different industries, bringing a broad and diverse knowledge base and strategic solutions to the many complex issues that businesses face.