Executive Order on Deferring Payroll Taxes
On August 8, 2020, the White House issued several executive orders aimed at providing some relief relative to the ongoing COVID-19 pandemic. One that has generated confusion among credit unions is the Memorandum on Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster. This memo, in part, directed the Department of Treasury to exercise statutory authority to defer the withholding, deposit and payment of the employee portion of certain taxes, specifically Social Security payroll taxes. Currently, these taxes total 6.2% of an employee’s salary up to a certain salary cap that is adjusted annual for inflation. The memo defers these taxes between September 1, 2020 and December 31, 2020.
The memo applies to employees who make under $4,000 every two weeks, calculated pre-tax (approximately $104,000 annually). However, this is only a deferral of the tax – the President and the Department of Treasury do not have the authority to actually forgive the tax. As a result, the memo also directs the Secretary of Treasury to “explore all avenues, including legislation” to eliminate the obligation to pay the deferred taxes.
One issue is whether this is mandatory. The memo itself is not particularly prescriptive or detailed. For now, it seems that the executive order itself does not require employers to cease collecting the deferred taxes. Meanwhile, there is risk involved if a credit union does defer these taxes, as there is not a guarantee at this time that the payroll taxes will ultimately be forgiven. It seems the hope is to make sure a brief payroll tax forgiveness would be part of a future economic relief bill. But if that does not happen, the tax would be due which could pose issues for employees owing larger future payments if the taxes were never withheld. Also, if an employee leaves in the interim, some law firms have indicated that the employer could be liable for the payment of the deferred tax.
However, the memo does direct the Secretary of the Treasury to issue implementing guidance, which has not yet been published but is expected in the coming days since September 1 is quickly approaching. Overall though, it is still unclear how this tax deferral will be handled. For example, will this be voluntary and if so, will employers that continue to collect these taxes be permitted to still submit the funds to Treasury? As tax law is highly complex, once guidance is published, credit unions may need to consult with counsel and/or a tax professional to determine the best way for the credit union to proceed.