Executive Order Provides Opportunity to Defer Employee Payroll Taxes – but Proceed with Caution in Doing So
On August 8, 2020, President Trump executed an Executive Order (the “Order”) providing employees with the opportunity to defer their portion of Social Security taxes. The Order directs Treasury Secretary Mnuchin to defer withholding, deposit, and payment of the tax imposed by Code Sec. 3101(a) (the 6.2% employee tax that provides for old-age, survivors and disability insurance under the social security tax), as well as any tax imposed by Code Sec. 3201 (Railroad Retirement Tax) that is attributable to the rate in effect under Code Sec. 3101(a), on wages or compensation (as applicable) paid during the period from September 1, 2020, through December 31, 2020.
This deferral is available with respect to any employee, the amount of whose wages or compensation (as applicable) payable during any biweekly pay period is generally less than $4,000, calculated on a pretax basis, or the equivalent amount with respect to other pay periods. Any amounts deferred in accordance with the terms of the executive order will not be subject to penalties, interest, additional amount, or addition to the tax.
The Treasury Department has been instructed to issue regulations related to the implementation of this Order.
Before employees make the decision to defer payment of their Social Security taxes in accordance with the Order, they should understand the following:
1. Decreased Withholdings May Increase Tax Due in April 2021. This Order directs Treasury Secretary Mnuchin to explore possible avenues (including legislation) for eliminating an employee’s obligation to pay any employment taxes deferred pursuant to the order in the future. However, there is no guaranty that he or Congress will be able to do so. If Secretary Mnuchin and/or Congress are unable to find an avenue for eliminating an employee’s obligation to pay any Social Security taxes he or she defers, that employee may be required to write a much larger check to the IRS in April of 2021.
It is critical to remember that an employee’s Social Security tax withholdings during the year are applied against their total tax obligation. Therefore, if an employee’s total withholdings decrease, but the amount of their total tax obligation remains the same, that employee may be required to pay a larger amount of tax in April of 2021 than they had anticipated. For this reason, employees considering a deferral of Social Security taxes should contact their tax advisor to calculate the impact that deferral will have on their overall tax owed.
2. State/Local Payroll Taxes Must Still be Withheld. The Order does not impact an employee’s requirement to withhold state payroll taxes. Therefore, unless and until any state taxing authority issues guidance allowing employees to defer their state payroll taxes, employees will remain subject to state payroll tax withholding.
A copy of this Executive Order can be found here.
DISCLAIMER: The information provided is for general informational purposes only. This post is not updated to account for changes in the law and should not be considered tax or legal advice. This article is not intended to create an attorney-client relationship. You should consult with legal and/or financial advisors for legal and tax advice tailored to your specific circumstances.