Payroll Tax Deferral Raises Questions

Nathan Smith

Article by Nathan Smith Featured Author

Posted September 2020

This is a companion article to the “Charitable Giving During a Pandemic” article, also written by Nathan Smith.

In a somewhat unprecedented move, President Trump issued an executive order on August 8 which instructs the Treasury Secretary to defer the collection of a portion of the so-called “payroll tax.” 1

The deferral applies to the tax levied under 26 USC 3101(a), commonly known as the employee’s portion of the Social Security tax. 2 This tax is equal to 6.2% of an employee’s wages. Employers are required to withhold the tax from an employee’s paycheck and submit it to the Treasury each pay period. 3 The executive order is effective through December 31, 2020, and applies to employees who gross $4,000.00 or less each bi-weekly pay period. This works out to include employees who have annual salaries of $104,000.00 or less.

It is important to note that the executive order establishes a deferral of the 6.2% tax, not a forgiveness. The executive order also states that the deferred tax will not be subject to the accumulation of penalties and interest. It is unclear whether the $104,000.00 income cap applies to combined incomes (as in married couples) or individual incomes, although it appears that the deferral will be available for each individual employee (regardless of marital status). As it stands the executive order will only be in effect for four months, so the maximum that most employees can benefit is approx. $2,100 of tax deferral.

President Trump has stated that he will seek to extend the deferral and forgive the deferred tax, if re-elected. Even a casual observer will note that this is no more than an unenforceable promise, and thus the possibility of recapture of the deferred tax will remain an open-ended question for some time. Actual forgiveness of the tax, of course, will require an act of Congress.

The uncertainty surrounding the deferral should cause discomfort for employers, who are responsible for submitting the deferred tax. Will the employer be required to withhold all deferred taxes in a lump sum from employees’ paychecks in January of 2021? With this in mind, employers have considered withholding regardless, or requiring an “opt-in” from employees who want deferral, so the deferred tax can be spread out over more pay periods. It appears that there is currently no right answer to the employer’s conundrum.

This brings up another point: the executive order will almost certainly be challenged in court as an abuse of Executive power. So it remains to be seen 1. Whether the payroll deferral will actually take place, and 2. If the deferral does take place, whether employees will be required to pay it back in January.

If you have any further questions about this topic, I will be happy to tell you that I do not know the answer.

  1. President Obama cut the Social Security tax in 2010 and extended the cut through 2011 and 2012. This was accomplished via Congressional action, however.
  2. Payroll taxes also include the Medicare Tax, levied under 26 USC 3101(b). This tax is equal to 1.45% and is left unaffected by the executive order.
  3. Employers are also responsible for submitting the “employer’s portion” of the payroll tax for each employee, which is equal in amount to the employee’s portion. Note that the CARES Act, passed in March of 2020, already gives employers the option to defer the employer’s portion of the tax.