President’s Payroll Tax Memorandum Creates Temporary Deferral; Leaves Taxpayers with Uncertainty
A critical component of the overall federal budget is made up of “payroll taxes.” The two primary payroll taxes that the IRS levies on wages are commonly referred to as FICA (the acronym for the Federal Insurance Contributions Act) taxes. FICA itself is comprised of two elements: (1) old-age, survivor and disability insurance (OASDI) (which is typically referred to as the Social Security tax), and (2) Medicare hospital insurance. Employees and employers evenly share liability for the total amount of FICA taxes due. An employee typically has FICA taxes withheld from his or her paycheck. An employer must collect and pay the taxes for the employee portion by deducting the taxes from the employee’s wages at the time of payment.1
On August 8, 2020, President Trump signed executive actions purportedly aimed to provide Americans with additional economic relief during the ongoing pandemic. The executive actions are technically comprised of three memoranda and one official executive order.2 Notably, one of the memoranda, entitled “Memorandum on Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster” (the Memorandum) implements a temporary, four-month payroll tax deferral (not a suspension) for certain workers.3 Ignoring the issue of whether or not President Trump’s actions conflict with Congress’s “power of the purse,” we will simply provide our readers with a brief look at the payroll deferral provision as is, and the uncertainty created by the action.
Section 2 of the Memorandum directs the Secretary of the Treasury, acting under 26 U.S.C. §7508A, to:
defer the withholding, deposit, and payment of the tax imposed by 26 U.S.C. 3101(a), and so much of the tax imposed by 26 U.S.C. 3201 as is attributable to the rate in effect under 26 U.S.C. 3101(a), on wages or compensation, as applicable, paid during the period of September 1, 2020, through December 31, 2020 [. . .].4“
Section 3 of the Memorandum establishes conditions clarifying that the deferral is only available with respect to employees earning less than $4,000—bi-weekly, and “calculated on a pre-tax basis.”5 Furthermore, the Memorandum explains that deferred amounts will be deferred free of penalties and interest.
Significantly, according to Section 4 of the Memorandum, “[t]he Secretary of the Treasury shall explore avenues, including legislation, to eliminate the obligation to pay the taxes deferred pursuant to the implementation of this memorandum.”6 However, as the action stands now, this is only a deferral—not a suspension.
Particularly given the uncertainty around the Treasury “exploration” regarding the repayment obligation once the deferral period expires, employers may not feel confident enough to act upon this relief measure. In other words, employers may fear the uncertainty and potential difficulties they would face if they have to later retrieve money from employees to settle their IRS obligations . . . and what if those employees are no longer with that employer.
Remember, payroll taxes are actually paid by both employees and their employers. These taxes ultimately fund Social Security and Medicare. On the one hand, this payroll tax deferral has the potential to “feel” like tax relief for the workers who temporarily see larger paychecks reflecting no withholdings. However, the measure is temporary, and that means that without further action, the taxes will be due once the deferral period expires. Quite possibly, voters will resort to pressuring Congress to pass legislation forgiving the entire accumulated amount. And no one is sure yet how this will affect Social Security and Medicare in the long run.
- IRC §3102(a). Note that the Social Security tax portion of wages is 6.2% for both the employer and employee portion. §3101(a), §3111(a), as amended by Pub. L. No. 113-295, Div. A, §221(a)(99)(A) and §221(a)(99)(B)(i), respectively. The Medicare portion of wages is 1.45% for both the employer and employee portion; however, an employee’s Medicare tax on wages exceeding $200,000 ($250,000 for a joint return) incurs an additional 0.9% rate. IRC §3101(b)(1), §3101(b)(2), as amended by the Patient Protection and Affordable Care Act (PPACA), Pub. L. No. 111-148, §9015(a)(1)(D), §10906(a), and the Health Care and Education Reconciliation Act of 2010 (HCERA), Pub. L. No. 111-152, §1402(b)(1)(A).
- A presidential executive order is a legally binding mandate, which is printed in the Federal Register. Executive orders provide federal agencies instructions for implementing federal law. A presidential executive memorandum often carries somewhat less weight than an executive order and is not required by law to be included in the Federal Register. And when an executive memorandum is published in the Federal Register it is clear that executive orders take legal precedence over presidential memoranda.
Author: Mary Lundstedt