On Saturday, August 8, 2020, President Trump issued an executive memorandum to defer collection of the employee’s portion of Social Security and Medicare, collectively known as FICA taxes, from September 1 through December 31, 2020.  The memo directs the Treasury Department to issue guidance on the deferral.  Deferral of FICA taxes means they will eventually need to be paid at a later date.

Deferral Details

The memo is unclear about who is eligible for the payroll tax deferment.  As it reads now, It applies to employees whose wages and compensation are generally less than $4,000 per bi-weekly pay period, or the equivalent of about $104,000 annual salary.  The memo doesn’t define wages and compensation, or say whether that includes pay things like bonuses, commissions, or overtime hours

Potential Issues

First and foremost, most employers want to know whether the order is mandatory.  The directive would require businesses to very quickly re-program their payroll systems to withhold the proper amount of tax from employees’ paychecks.

The president’s order cites tax code Section 7508A, which gives Treasury authority to postpone certain deadlines in the event of a federally declared disaster. Many practitioners interpret this code section as providing authority to delay or extend deadlines, but not to change the timing of withholding or impose a mandatory pause on withholding for a certain period of time

Additional Guidance on the Way

The memo directs Treasury Secretary Steven Mnuchin to explore avenues, including legislation, to eliminate the obligation of employees to pay back the taxes that are deferred. That would require the administration to convince Congress to act.  We are monitoring developments and their implications closely and will provide additional updates as guidance is released.