On August 8, 2020, President Trump issued the Memorandum on Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster (the “Memorandum”).
This article summarizes key details of the Memorandum and highlights several important issues to keep in mind regarding deferring taxes pursuant to the Memorandum:
1) This is a Presidential Memorandum and does not carry the legal weight of an Executive Order. Sec. 5(c) of the Memorandum states that it “is not intended to, and does not, create any right or benefit … enforceable at law or in equity by any party against the United States….
2) This Memorandum provides for the deferment of the collection of the employee’s share of social security and Medicare (equal to 7.65% of the employee’s compensation) for the period starting September 1, 2020 and ending December 31, 2020. The Memorandum does not apply to an employee’s income tax.
3) Who is able to take advantage of this deferral? Any employee whose compensation is less than $4,000 payable during any bi-weekly pay period. This equates to an annual compensation of $104,000, on a pre-tax basis.
4) This is not a tax cut or tax rebate. The Memorandum only defers the payment of the tax, meaning that it in is essence a short term no interest loan. Should an employee opt to take advantage of the deferment he or she will need to File Form 8919 with their 2020 federal income tax return.
5) The Memorandum is silent as to when the tax must be paid back. It is possible that the government will require the deferred tax to be paid by the due date of the return, which is April 15, 2021.
6) Sec. 4 states that the Secretary of the Treasury shall explore avenues to eliminate the payment of the deferred taxes. To be safe, DON’T BET ON FORGIVENESS OF THIS TAX DEBT!
7) The employee owes the tax. However, Sec. 3402 states that the employer is liable for payment of this type of tax. What happens if the neither the employee or employer end up paying it? In that situation there is the possibility that the owner(s), officer(s), or responsible employee(s) can be held personally liable for the tax under the Trust Fund Recovery Penalty. There is also the potential difficulty in attempting to prove your employee (or by the time the IRS comes knocking, “former employee”) paid the deferred tax. Trust me, the IRS won’t help you prove this fact.
8) The employer is not required to allow its employee the option of deferring this tax. If you do, you should make certain that your employee understands that they assume the liability to pay back this tax and are required to pay back the tax with their 2020 return and file form 8919 with the return.
TAKE AWAY: As an employer you should think long and hard about allowing an employee the option of deferring their share of social security and Medicare payroll tax liability under this Memorandum. Forgiveness may never come. By allowing this, a company is essentially guaranteeing a tax liability for both the employee and employer, and, if gone unpaid, potentially a personal tax liability under the Trust Fund Recovery Penalty against the company’s responsible owners or employees.
We are here to help employers and employees address tax issues that may arise due to Covid-19. I can be reached at 918-550-8105 or by email at firstname.lastname@example.org.