As the federal government is locked in debate about how to support businesses and workers during the COVID-19 pandemic, one of the big issues has been how to provide financial relief. On August 8, President Trump signed an executive action that deferred the employee portion of Social Security taxes for some individuals. 

The action defers taxes - meaning they’ll need to be paid in the future - and also directs the U.S.  Treasury Secretary to “explore avenues, including legislation, to eliminate the obligation to pay the taxes deferred pursuant to the implementation of this memorandum.”

Legislative history

Agreeing on a federal course of action has been challenging. The Families First Coronavirus Response Act was signed into law by President Trump on March 18, 2020, followed by the Coronavirus Aid, Relief, and Economic Security (CARES) Act. As the full impact of COVID-19 was uncertain at that time, these measures provided financial support for employers and workers for a limited duration

The CARES Act specifically allows employers to delay paying their part of Social Security taxes until December 31, 2020. These deferred amounts will be due in two equal payments, one by the end of 2021 and the other by the end of 2022. 

New bill unsuccessful

Democratic leaders and the White House attempted discussions at another COVID-19 stimulus bill in early August, but negotiations were unsuccessful. Following the attempt to find a mutually agreed-upon approach, President Trump approved a memorandum creating a payroll tax deferral for some, although not all, employees.

As part of the memorandum, the U.S. Treasury Secretary is authorized to defer withholding, deposit, and payment of the tax on wages or compensation, as applicable, that would be normally paid between September 1, 2020, through December 31, 2020. As a result, the employee’s share of Social Security tax is deferred for that time period.

However, the memorandum contains several conditions:

• The deferral is available to any employee, the amount of whose wages or compensation, as applicable, payable during any biweekly pay period generally is less than $4,000, calculated on a pretax basis, or the equivalent amount with respect to other pay periods; and 
• Amounts are to be deferred without penalties, interest, additional amount, or addition to the tax. 

The Treasury Secretary was directed to offer help in implementing the terms of the memorandum.

Appropriate legal authority

While this memorandum, as well as several other executive actions signed on August 8, states that they’ll be executed as is consistent with applicable laws. However, some legislators and watchdogs are questioning President Trump’s authority to require this tax deferral.

What does this mean for employers?

Legislators and watchdogs aren’t the only ones with questions about the memorandum. Employers also have concerns about how to put the payroll tax deferral into action. One major question deals with whether or not employers will need to withhold more taxes from paychecks to pay taxes back starting in January of 2021. In the absence of a law to forgive taxes, are employers required to pay them back? What if employers can’t change their payroll software in time? Is this deferral required or is it optional? 

More details will be forthcoming about this memorandum as discussions evolve. In the meantime, contact Smolin Lupin for questions on how to proceed in a way that stays in compliance with tax laws.