On Saturday, the President signed an Executive Order directing the Secretary of the Treasury to use his authority to defer certain payroll tax obligations. As with all tax changes, the details are very important, and there are questions and concerns.
Here are the details …
The single most important takeaway is that this is a deferral – NOT a cut – of the withholding and collection of the EMPLOYEE’s portion of OASDI – the 6.2% social security tax on wages. Note that the EMPLOYER’s portion is already being deferred under the CARES Act. The deferral will run from September 1, 2020, to December 31, 2020. This means that, absent future legislation, the tax will have to be paid sometime after 2020.
The second most important takeaway is that this only applies 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.”
This equates to employees making less than $104,000 per year ($4,000 x 26), or $2,000 per week, or $4,333 if your payroll is semi-monthly. Note that the text uses the term “generally,” which is presumably meant to allow this to apply to employees who receive a bonus that would take one paycheck over a specific amount. What is also suggested is that this is a cliff – so if your paycheck is generally above the specified amount, you would not be eligible.
Now for our questions and concerns …
Is this mandatory? The text states that the deferral “shall be made available” which probably leads you to ask, why would I NOT take advantage of this? Refer back to the details – this is a deferral, not a cut. Which means that it’s essentially a short-term, interest free loan. That’s obviously not the worst thing in the world, but what happens if the money is spent and not able to be paid back? Who is on the hook for this? Is it the employer or the employee? Under the law, it’s the employer’s responsibility to collect and remit payroll taxes, so that tells me that it would be the employer, but how does the employer get it from the employee? How would the government get it from the employee?
All of the above is meant to be addressed by another section of the Executive Order stating, “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.” It is widely held that, while the President can DEFER the collection of taxes, the President has no authority to REDUCE taxes. This means that it would be up to Congress to make this problem go away, and permanently forgive this liability. The unfortunate part is that there seems to be no appetite on either side of the aisle, or in either chamber of Congress for a payroll tax cut.
So what do we do?
For now, we wait. The Treasury has until September 1 to issue guidance on how this is to be done. So sit tight, and we’ll keep you updated.