On Aug. 8, 2020, President Trump issued an executive order (the Order) directing the Treasury Secretary to permit employers to defer certain payroll tax payments from Sept. 1, 2020 through Dec. 31, 2020. The executive action is an attempt to help workers in response to the on-going COVID-19 pandemic. Under the Internal Revenue Code section that permits a deferral of tax during a disaster, it appears that the Secretary has to issue some direction for the Order to become effective. The same section provides that the deferral can be for up to one year.
The Order appears to be specific to the employee’s 6.2% old age, survivors and disability insurance portion of payroll tax and does not appear to include the 1.45% Medicare portion. The new payroll tax deferral is separate from the CARES Act provision that allows for the deferral of the employer’s portion of payroll tax. More information on the payroll tax deferral permitted under the CARES Act can be found in our earlier alert and summarized here.
Generally, the executive order makes the payroll tax deferral available to employees who make less than $4,000 during any bi-weekly pay period (or presumably about $104,000 per year). The executive order also provides that the amounts deferred under the order will not be subject to penalties or interest.
The Order raises several questions for employers, including whether it is voluntary, how to determine which employees are eligible (that is, what compensation is counted for this calculation), when the tax will be due, and how to collect the deferred tax from employees, especially employees who are no longer employed when the tax is due in the future. We expect the Department of Treasury to issue at least a preliminary statement soon and to expedite guidance on the new payroll tax deferral as it is intended to be effective in only three weeks. More information will be forthcoming from RSM when additional details are available.