Pauline focuses her practice on United States federal income tax. Her practice includes tax planning for mid-size LLC and partnerships, public financing, mergers and acquisitions, executive compensation, and tax controversy. Some of...Read More by Author
Trump’s Payroll Tax Delay: A Conundrum for Employers
On August 8, 2020, President Trump signed a presidential memorandum deferring certain payroll tax obligations for employees from September 1 through December 31, 2020. The memo permits employees to defer payment of the 6.2% Social Security tax that is withheld by their employers from each paycheck, and applies to employees who generally earn less than $4,000 pre-tax every two weeks ($104,000 yearly). While, at first glance, this may appear to be a cause for celebration for employees, the impact of the memo is still uncertain, and employers may understandably be reluctant to change their withholding practices at this time.
Equally important, for employers, is what this presidential memorandum does not do. The memorandum defers the employees’ portion of the Social Security tax but it does not forgive the tax obligations. The memo instructs the Secretary of the Treasury to “explore avenues, including legislation, to eliminate the obligation to pay the taxes deferred” but the elimination of the tax obligation requires a Congressional act. Thus, it is far from guaranteed. This leaves both employers and employees in a lurch. Even though the tax obligations belong to the employees, employers are responsible for withholding the tax from their employees’ paychecks and remitting the tax to the IRS. If employers stop withholding the tax and the tax obligations are not forgiven, employers run the risk of being responsible for paying the entire amount. In light of this memo, employers are left with three viable options, each with its pros and cons.
OPTION 1: STOP WITHHOLDING PAYROLL TAX
One option is for employers to stop withholding the Social Security tax and pass along the savings to their employees—an obvious benefit to emp0loyees that could provide a needed morale boost. However, employers who stop these withholdings (not the employees who realize the savings) may continue to be responsible for paying the tax in the event the tax is not forgiven. This places employers in the unenviable position of trying to predict what Congress may or may not do in the future. Thus, employers may understandably be reluctant to pass along the savings to their employees and risk having to pay the IRS a lump sum “catch up” amount next year. In short, the incentive to stop withholding and pass along the savings to employees appears minimal, at best.
OPTION 2: CONTINUE WITHHOLDING AND REMITTING
Notably, the memo does not require employers to stop withholding the employees’ portion of the Social Security tax. Thus, employers may simply continue to withhold and remit such tax as if the new memo was not signed. While employees may be disappointed in this decision after hearing news of a “payroll tax” break, this would avoid the “catch up” payment scenario described above. If the tax obligations are ultimately cancelled by a Congressional act, employees will be able to recoup any overpayment on their 2020 tax returns. From the employers’ perspective, this appears to be the lower-risk option, particularly in light of the difficulty in predicting future Congressional action, and the lack of more detailed guidance regarding how the IRS will implement the memo.
OPTION 3: CONTINUE WITHHOLDING BUT SET ASIDE
A third potential option for employers is to continue withholding payments but set aside the money until the issue of forgiveness is resolved. Unfortunately, this option comes with its own issues, such as the potential that employers would be deemed responsible for safeguarding these funds—which could be significant for larger employers.
In the absence of a definitive resolution to the issue of forgiveness, Obermayer anticipates that many employers will simply continue to collect payroll taxes and remit them to the IRS in the usual way—at least until further legislation or guidance emerges. As always, Obermayer will continue to monitor employment issues pertaining to COVID-19, and will keep readers apprised of any new developments. Should you have any specific questions about this or other pandemic-related employment law issues, please reach out to a member of Obermayer’s Labor & Employment department.
The information contained in this publication should not be construed as legal or medical advice, is not a substitute for legal counsel or medical consultation, and should not be relied on as such.