Payroll Tax Deferral: Uncertainties Remain One Week Prior to Start of Applicable Period

On August 8, 2020, President Trump signed an executive memorandum (the Memo) directing Treasury Secretary Mnuchin to issue guidance deferring the withholding, deposit and payment by employers of the employee portion of certain social security (and related railroad retirement) taxes imposed under sections 3101(a) and 3201(a) of the U.S. Internal Revenue Code of 1986, as amended (FICA Withholding Taxes). The Memo specifies that such deferral shall apply to wages and compensation paid for the period between September 1 and December 31, 2020 to employees who receive less than $4,000 of pre-tax wages and compensation on a bi-weekly basis ($104,000 on a yearly basis). The Memo further provides that no penalties, interest or additional amounts will apply to any FICA Withholding Taxes deferred, and directs Treasury Secretary Mnuchin to explore “avenues, including legislation,” to provide for forgiveness of those deferred FICA Withholding Taxes.

Although the deferral period specified in the Memo begins in approximately one week, no Treasury guidance has been issued implementing the policy set forth in the Memo. As a result, neither the Memo nor any Treasury authorities currently provides a basis for employers to defer the employee portion of any such FICA Withholding Taxes.

Moreover, significant uncertainties remain regarding how any deferral under the Memo will be effected in the absence of any implementing Treasury guidance. For instance, although Treasury Secretary Mnuchin reportedly said in an interview on August 12 that any such deferral will be optional for the employer and not mandatory, it is not clear how any such election is to be made. The timing and manner of collection of any FICA Withholding Taxes that are deferred and will be due in 2021 (absent further action), including whether an employer will be liable for any such amounts that an employee fails to repay, also need to be confirmed. Moreover, Treasury’s ultimate authority to effect any deferral of FICA Withholding Taxes under the statutory provisions cited by the Memo is itself questionable and subject to legal challenge.

These and other concerns have caused a number of prominent interest groups, including the American Staffing Association and the U.S. Chamber of Commerce (along with over 30 other organizations), to send letters to Treasury officials, as well as to Senate Majority Leader Mitch McConnell and House Speaker Nancy Pelosi, urging them to clarify and/or go beyond the scope of the Memo. However, no such clarification has emerged. Given the number of questions that remain unresolved, and that may exist even following any Treasury guidance implementing the Memo, the more prudent course of action for employers at this time is probably not to take any action to try to implement the deferral of FICA Withholding Taxes. Even once any such Treasury guidance is issued, employers should consult with their tax advisors regarding its implementation, and material considerations surrounding it, prior to altering their current FICA Withholding Tax practices to effect a deferral.