Executive Order Deferring Withholding of Employee Social Security Taxes

On Saturday, August 8, President Trump issued an Executive Order “directing the Secretary of the Treasury to use his authority” under Section 7508A of the Internal Revenue Code “to defer certain payroll tax obligations with respect to the American workers most in need.”  Unfortunately, this is another situation where businesses and advisors need more information and official guidance before making decisions on processes needed to comply with the rule.

Executive Summary of the Executive Order:

  • It is not effective immediately; it only applies for wages “paid” between 9/1/2020 and 12/31/2020. 
  • The deferral is only on the 6.2% social security income tax portion assessed on employees only; it does not apply to the 1.45% hospitalization portion of payroll taxes. 
  • The order does not affect the assessment of the portion of the tax on employers.  (Recall though that these taxes are already subject to a payment deferral).
  • It only effects employees making less than $4,000 during a bi-weekly pay period ($104,000 annually).  Though not specific, this appears to be a cliff provision where if wages exceed the limit, no deferral will be available.  Further, and though the order does not specifically provide details, presumably the $4,000 would be calculated in a similar fashion for different payroll periods. 
  • The order may only be a “deferral” of the tax on employees and not a permanent elimination.  Affected employees may need to repay this deferral (without penalties, interest, or any additional amount of tax}”.  However, the Order does authorize the Secretary of the Treasury to “explore avenues, including legislation, to eliminate the obligation to pay the taxes deferred.” 
  • The tax deferral may be elective to employees.  The order is written with language that the “deferral shall be made available (emphasis added) with respect to” employees with wages less than the $4,000 ceiling.  The language used in the order does not seem to impose a requirement to defer the tax.  This could cause bookkeeping headaches.  Possibly, repayments could be handled through an individual’s Form 1040 versus additional changes in employer withholding rules.

The President may have given the House and Senate an opportunity to, effectively, override his executive action by coming to some joint solution acceptable to both Republicans and Democrats by delaying the effective date of this Order. 

Hopefully, since there is no official guidance on implementation of this deferral under the Treasury Department’s authority (to defer withholding, deposits, and payment of the applicable taxes imposed), additional detailed guidance will come sooner rather than later.  In the meantime, we will continue to monitor developments.  Please check Our Thoughts On regularly and do not hesitate to call your Schneider Downs tax advisor. 

A copy of the order can be found here.

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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

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