FEDERAL PAYROLL TAX DEFERRAL PROGRAM
On August 8th, President Trump issued an executive order that instructed Treasury Secretary Mnuchin to defer the collection of the employee’s portion of the old-age, survivors, and disability insurance tax (i.e., the 6.2% FICA portion withheld from an employee’s paycheck) on wages or compensation paid between September 1, 2020 and December 31, 2020.
This deferral is only available for employees whose pre-tax wages or compensation are “generally” less than $4,000 during a biweekly pay period, or an equivalent amount with respect to other pay periods. No penalties, interest, or additions to the tax are to accrue by reason of this deferral.
This executive order does not eliminate the employee’s liability for the FICA tax. Rather, it simply defers payment until 2021.
On August 28th, the U.S. Treasury Department and Internal Revenue Service (IRS) released guidance regarding the executive order.
The Treasury’s guidance makes clear that an employer may elect to defer the payment of the employee portion of these taxes on “applicable wages” until next year, when they would be owed in installments between January 1, 2021 and April 30, 2021. “Applicable wages” are defined as those wages paid to an employee on pay dates between September 1, 2020 and December 31, 2020, “but only if the amount of such wages or compensation paid for a bi-weekly pay period is less than the threshold amount of $4,000 or the equivalent threshold amount with respect to other pay periods.” The guidance specifies that applicable wages are determined on a pay period by pay period basis. Finally, the guidance makes clear that employers are required to pay these taxes to the federal government, but goes on to state that employers “may make arrangements to otherwise collect the [due taxes] from the employee.”
The guidance leaves several clear takeaways. First, it is clear that an employer is permitted to defer payment of these taxes, but is not required to. Second, it is likewise clear that unless further action is taken (likely by Congress), these taxes are merely deferred, not forgiven, and will be due by the end of April 2021. Finally, it is not clear what, if any, role an individual employee plays with respect to determining whether they want their share of these taxes deferred, or paid in the normal course.
Employers will want to keep each of these points in mind as they evaluate whether or not to participate in this elective deferral.