The President has signed an Executive Order directing the Treasury Department to issue guidance under IRC §7508A deferring the withholding, deposit, and payment of the tax imposed under IRC §3101(a) (the old age, survivor and disability portion of social security taxes imposed on individuals) and IRC §3201(Railroad Retirement Act taxes tied to the rate of tax under IRC §3101(a)).[1] The deferral will apply to the period from September 1, 2020 (note the delayed effective date) through December 31, 2020.[2]

Under provisions of the CARES Act, as later amended, all employers are able to defer payment of the employer portion of these taxes at this time, explaining why this order is limited to the employee portion of such taxes.

Basic Order for Deferral of Employee OASDI Taxes

The EO leaves to Treasury the obligation to publish the necessary guidance to implement this program. The order begins with the following:

Sec. 2. Deferring Certain Payroll Tax Obligations. The Secretary of the Treasury is hereby directed to use his authority pursuant to 26 U.S.C. 7508A to defer the withholding, deposit, and payment of the tax imposed by 26 U.S.C. 3101(a), and so much of the tax imposed by 26 U.S.C. 3201 as is attributable to the rate in effect under 26 U.S.C. 3101(a), on wages or compensation, as applicable, paid during the period of September 1, 2020, through December 31, 2020, subject to the following conditions:[3]

The first condition limits the application of the provision to individuals with gross pay in a pay period that is less than the equivalent of $4,000 for a bi-weekly pay period:

(a) The deferral shall be made available with respect to any employee the amount of whose wages or compensation, as applicable, payable during any bi-weekly pay period generally is less than $4,000, calculated on a pre-tax basis, or the equivalent amount with respect to other pay periods.[4]

The $4,000 bi-weekly payroll would work out to an annual payroll of $104,000. Thus, it would appear the maximum gross payrolls to qualify for this relief would be the following for various pay periods:

Weekly: $2,000
Semi-monthly: $4,333.33
Monthly: $8,666.67.

As written the guidance indicates this is a cliff rule—if an employee’s pay goes over the limit at all, the entire amount of employee OASDI must be withheld and paid over by the employer.

The second condition provides that no penalties, interest or additions to tax would apply to these deferred payments:

(b) Amounts deferred pursuant to the implementation of this memorandum shall be deferred without any penalties, interest, additional amount, or addition to the tax.[5]

Treasury Ordered to Issue Guidance

The EO goes on to require Treasury to provide the necessary guidance to implement this order:

Sec. 3. Authorizing Guidance. The Secretary of the Treasury shall issue guidance to implement this memorandum.[6]

Such guidance presumably will appear before September 1, the date when this deferral is scheduled to take effect.

Forgiveness? Well, Maybe…

The EO merely defers the tax in question, as IRC §7508A (the provision cited by the President to enable this action) merely allows Treasury to defer the payment of taxes without penalty or interest for up to a year during a covered disaster. Clearly, there will be significant issues that will arise if this is merely a deferral of the taxes the employee owes—at some point employees would need to pay these taxes and employers would need to deposit them.

The order recognizes the fact that forgiveness would be, shall we say, “helpful” in this case. The EO directs Treasury to explore ways these obligations might be forgiven in the future:

Sec. 4. Tax Forgiveness. The Secretary of the Treasury shall explore avenues, including legislation, to eliminate the obligation to pay the taxes deferred pursuant to the implementation of this memorandum.[7]

This lack of a forgiveness mechanism, if it continues through September 1 when the rules are to take effect, would create some real questions that employers will need to deal with. Presumably Treasury’s guidance will have to describe some mechanism to handle the eventual payment of these taxes if no forgiveness mechanism is in place by September 1.

The mention of exploring legislation to achieve forgiveness is likely the preferred mechanism to waive the tax obligations due, as negotiations continue on another package of COVID-19 relief legislation.

If such forgiveness takes place for the employee’s FICA obligations, it seems very possible that we may also see forgiveness of the employer FICA currently being deferred under provisions of the CARES Act included in whatever mechanism would be used to provide relief to the employees.

What Do We Do Now?

Prior to September 1 there’s nothing to do regarding payroll to be issued before that date, except likely explain to employees that this removal of FICA withholding from their paychecks does not take effect until September 1.

However, those involved with payroll processing and those who advise such individuals will need to watch for Treasury’s guidance in this area, as well as any developments in legislation. Hopefully the forgiveness issue is resolved before September 1, but if it isn’t those involved with payroll will need to consider how they plan to move forward, including what options are and are not available to mitigate any potential issues.

[1] “Memorandum on Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster,” Executive Order, August 8, 2020, https://www.whitehouse.gov/presidential-actions/memorandum-deferring-payroll-tax-obligations-light-ongoing-covid-19-disaster/ (retrieved August 8, 2020)

[2] “Memorandum on Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster,” Executive Order, Section 2

[3] “Memorandum on Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster,” Executive Order, Section 2

[4] “Memorandum on Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster,” Executive Order, Section 2(a)

[5] “Memorandum on Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster,” Executive Order, Section 2(b)

[6] “Memorandum on Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster,” Executive Order, Section 3

[7] “Memorandum on Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster,” Executive Order, Section 4