On August 8, 2020, President Trump signed an executive action that postpones the collection of employee payroll taxes from September 1st through December 31st. This affects the Social Security FICA taxes. The idea behind taking this action is that, during these difficult economic times due to the COVID pandemic, deferring tax withholding has the potential to put more money in working Americans' pockets to help boost the economy. This action of the Executive Branch results from Congress being unable to arrive at a compromise regarding another round of stimulus assistance.
The memorandum directs “the Secretary of the Treasury to use his authority to defer the withholding, deposit, and payment of the tax.” This option will be available to employees who’s bi-weekly wages are less than $4,000 or equivalent for other pay periods. Guidance from the Secretary of the Treasury is expected very soon; possibly even by week’s end.
FICA is currently made up of employers and employees paying a 6.2% payroll tax on wages capped at $137,700 (for 2020). Employees also pay a Medicare tax of 1.45%. The previously enacted CARES Act allows employers to defer the deposit and payment of their portion of the Social Security taxes until December 31, 2020.
The important thing to keep in mind is that this action is just a possible deferment. The President alone does not have the authority to forgive these taxes, so it is very likely employees will need to pay this back in 2021. While it is very important for employers to remain aware and updated because this is headed down the path of being another payroll processing change to implement, there are far more questions than answers right now. Employer questions including things like:
- Is it a mandatory option?
- How this will be reported on a Form W2 or 1040?
- Can employees opt out of the deferral?
- Can businesses hold the money and make the payments when required?
- When and how will re-payments be required (lump sum or over time)?
All of this is just the tip of the iceberg.
It is expected that the Democrats will challenge this action in court, but unless it is blocked or if it is superseded by an enactment of a comprehensive relief bill, it is schedule to become effective September 1st. President Trump has stated that, if he is re-elected, he will work to forgive these taxes. However, that appears to be a major uphill battle.
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