President Trump Issues Payroll Tax Deferral Order

Author: Robert S. Teachout, XpertHR Legal Editor

August 12, 2020

President Trump has issued an executive order to implement a temporary payroll tax holiday to provide financial relief to employees affected by the coronavirus public health crisis. The Memorandum on Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster instructs the Secretary of the Treasury "to defer the withholding, deposit, and payment" of the employee portion of Social Security taxes. The order comes as negotiations on another COVID-19 disaster relief bill have stalled.

When implemented, the order will defer withholding and payment of employees' 6.2% portion of Social Security taxes on wages earned from September 1 through the end of the year. To be eligible, an employee's gross earnings in a two-week period must be less than $4,000 ($104,000 per year). The deferred amounts will not accrue any penalties or interest.

The new payroll tax deferral is separate from the Coronavirus Aid, Relief, and Economic Security (CARES) Act provision that allows for the deferral of the employer's portion of payroll tax. The deferral option will not be available until the IRS issues implementing guidance as directed by the executive order.

It is unclear if employees will have to opt in to take advantage of the tax deferral, just as employers were required to do under the CARES Act. In addition, in an interview with Fox Business, Treasury Secretary Steve Mnuchin indicated that participation won't be mandatory for businesses. "We can't force people to participate, but I think many small businesses will [participate] and pass on the benefits," Mnuchin said.

Another issue that has not yet been addressed concerns when the deferred tax withholdings would have to be repaid and how. The order directs the Treasury Secretary to explore avenues that would waive the obligation to repay the deferred taxes. But that would most likely require legislation, and neither Republicans nor Democrats in Congress have embraced the President's proposal since he initially floated the idea of a payroll tax holiday a year ago.

If legislation forgiving the tax is not passed, employers could be put into the position of either clawing back the money from employees (all at once or in payments) or paying the amounts themselves. As a result, many payroll experts are advising employers not to take action until further information is available.

President Trump also issued a memorandum that authorizes $400 per week in additional unemployment benefits. The $400 amount reflects a $300 federal contribution and a $100 state contribution. Another memorandum directs the Secretary of Education to continue the temporary cessation of student loan payments and the waiver of interest until December 31, 2020.