Legal Alert: To Defer or Not to Defer; Analyzing President Trump's Employee Payroll Tax Deferral
President Trump’s August 8, 2020 Executive Order, titled “Memorandum on Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster,” is in full swing. The Order allows but does not require employers to defer withholding their employees’ portion of Social Security taxes. For participating employers, this means their employees will now receive an additional 6.2% of their gross earnings on each paycheck issued from September 1, 2020, through December 31, 2020 (payroll tax deferrals are only available for employees who earn less than $4,000 bi-weekly, or roughly $104,000 annually). However, many employers have chosen not to participate in the deferral program, and they cannot be blamed for their decision.
The first thing to understand about Trump’s Order is that it is merely a deferral, not a forgiveness. The deferral ends on December 31, 2020. Thereafter, not only will the employee’s portion of Social Security taxes be reinstated, but the employer must also begin withholding additional amounts from its employees in order to completely reimburse the federal government by May 1, 2021. Any unpaid and deferred taxes remaining as of May 1, 2021, will accrue interest, penalties, and additional taxes. For many employers, the inevitable headache waiting for them on January 1, 2021, is simply not worth the temporary relief they can provide their employees.
Even more pressing, however, is the liability that employers may face if an employee quits before they have repaid their deferred taxes. Trump’s Order is silent on the matter, and subsequent guidance from the U.S. Treasury Department merely provides that employers may “make arrangements to otherwise collect” the applicable taxes from their employees. The concern for employers is that the federal government may come after the employer for the unpaid taxes if the employee cannot be located. Given this potential liability, as well as the time and effort involved with “making arrangements” with their employees, there is very little incentive for employers to participate in the deferral program.
Still, there may be a big reward for those employers that take the risk and participate in the deferral. President Trump has made overtures toward forgiving the deferred taxes altogether if he is reelected. To be fair, Congress has reacted lukewarm to this suggestion, and the odds that it comes to fruition are fairly low. However, 2020 has seen enormous government bailouts, grants, forgivable loans, and other economic relief never before thought possible. Nothing can be ruled out and everything is on the table. If the tax deferrals are ultimately forgiven, then participating employers will be heroes to their employees.
If you have questions about participating in the deferral program, or how it may affect you as an employer or employee, please reach out to your Rothberg attorney.
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