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Uncertainty surrounds executive order payroll deferral

Aug 21, 2020

On August 8, President Trump signed an executive order temporarily delaying the withholding, deposit and payment of the employee contribution of Social Security payroll taxes from September 1 to December 31.

The order is only applicable to those employees that make less than $104,000 annually.

President Trump’s executive action suspending the employee portion of the payroll tax won’t be mandatory for businesses, according to Treasury Secretary Steven Mnuchin.

“We can’t force people to participate, but I think many small businesses will (participate) and pass on the benefits,” Mnuchin said August 12 on Fox Business.

The order creates uncertainty for employers because the taxes are only deferred, not eliminated.   As stated in the order, the president will urge Congress to pass legislation forgiving the deferred tax.

Additionally, it is uncertain who decides to defer the employment taxes.  Is it a decision made by the employer or is it made on an individual basis? 

In an August 12 letter to Treasury, the AICPA recommends guidance be issued that the election is made by the employee and the employee would be “primarily liable for the payment of the tax” if Congress does not pass legislation to forgive the tax.   On August 18, a large group of business organizations sent a letter to Treasury and Congressional leaders, also asking for guidance, but requesting the election to defer be made by the employer to avoid the complexity of an employee by employee election.

Who is right and which method should be followed?  Currently there is no one answer.

We feel there are few potential options for employers, each with their own benefits and consequences:

  • If the employer passes on the 6.2 percent deferred tax payments to their employees and Congress does not act, then the employer will either need to pay the 6.2 percent from their own revenue or claw back the payments from their employees. We would recommend the employer have a signed statement from each employee recognizing that any deferral repayment is the responsibility of the employee.
  • If the employer chooses not to pass on the 6.2 percent deferred payments to their employees (essentially to use the payment as a short-term interest free loan), then their employees do not receive the intended benefit and the employer may be open to negative public relations consequences. If an employer chooses this approach, we would recommend the funds be deposited into a separate bank account and if possible, done so in a way to provided creditor protection. 
  • If the employer chooses to withhold the tax and remit it to the government, then their employees do not receive the intended benefit and the employer places themselves in a position to be in noncompliance with a presidential executive order.

We will continue to monitor and provide updates on further developments.

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Gregory G. Butler, CPA
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