The White House has been wanting to eliminate the payroll tax for months allowing more money to go into employees pockets which would, theoretically, stimulate the economy by increasing spending ability.
Due to the breakdown of negotiations between Democratic leadership and the White House, the White House got its wish when, on August 8, 2020, the President issued four (4) Executive Orders – one of which defers payroll taxes from September 1, 2020 through December 31, 2020.
What are Payroll Taxes?
The terms “payroll tax” and “employment tax” are used interchangeably and refer to taxes imposed on employee wages under the Federal Insurance Contributions Act (“FICA”). The FICA tax has two (2) parts:
- Social Security Tax – a 6.2% tax that applies to wages paid up to the annual Social Security wage base ($137,700 for 2020); and
- Medicare Tax – a 1.45% tax that applies to all wages paid.
The employer withholds the employee share of the FICA tax from wages paid to the employee and the employer also pays its share of the FICA tax based on those wages.
The Payroll Tax Deferral Order in a Nutshell
Under the Executive Order, withholding, deposit and payment of the employee’s share of the 6.2% Social Security Tax under IRC Section 3101(a) are deferred on wages paid during the applicable four (4) month period. The deferral will occur without penalties, interest, additional amount or addition to the tax. Additionally, this deferral only applies to employees with biweekly, pre-tax income for less than $4,000, or a similar amount where a different pay period applies – this is equal to an annual salary of approximately $104,000.
The Order does not address the employee’s share of the 1.45% Medicare Tax under IRC Section 3101(b) which will still need to be withheld by the employer.
The President issued the Order using authority under IRC Section 7508A, which only allows the granting of a delay in payments or other actions in response to a disaster declaration. There is no authority in the IRC allowing for the entire abatement of any tax as a result of a disaster.
The Treasury has been ordered to issue guidance on implementing the deferral and to explore ways that the deferred taxes can be eliminated completely whether through administrative avenues or legislation. This guidance will be essential to understanding this Executive Order.
How Will Implementation Work?
At this time, there are many unanswered questions about how the Order will play out in practice including:
- Is there any requirement that employers must temporarily stop withholding the employee’s share of the tax in addition to not paying the tax?
- Is the deferral optional or mandatory?
- If optional, would an employer take advantage of the deferral?
- What about the interplay with state laws (e.g. some state employment laws require that an employer have an employee’s written permission to withhold anything from their wages that the employer is not required to withhold)?
- How should employers implement the deferral in the case of job changes?
Its also unclear how much effect the deferral will actually have on the economy since the taxes will eventually need to be paid.
Guidance from the Treasury will be crucial in answering these and other questions.