Last week, after Congress couldn’t reach an agreement on a Phase 4 “stimulus” bill, President Trump took matters into his own hands by executive action on Saturday. The executive actions included the extension of federal assistance for unemployment, continued student loan relief, a moratorium on evictions and a continued payroll tax holiday for Americans making less than $104,000. According to JPMorgan Chase, the payroll tax holiday could put up to $40 billion a month into the paychecks of American workers. Whether you believe the payroll tax holiday will provide the needed stimulus or not, it poses both legal and logistical questions for businesses, big and small.
Specifically, the President’s memorandum directs the Treasury Secretary to defer the employee portion of the payroll taxes that would be owed between Sept. 1, 2020 and Dec. 31, 2020. This ends up pausing the withholding of the social security portion of payroll taxes (6.2%) for workers earning less than $104,000 a year. It’s important to note that under the CARES Act, certain employers are already allowed to defer the employer portion of social security (6.2%) through 2020, repayable over a two year period beginning in 2021.
While there are likely many different questions that arise from this executive action, one of the primary problems is that this is not a tax cut, but a deferment. This means that in 2021, the tax will likely still need to be paid; however, in commentary, the President has vowed to forgive the liability and to make the deferment permanent upon his re-election in November. But given the uncertainty surrounding such relief, it’s possible that both the employer and the employee could be stuck with a larger tax payment in 2021, leaving businesses with some complex accounting to make it work.
With this payroll tax holiday, employers are put in a precarious situation of having to decide whether to continue to withhold under previous guidance, defer withholding under the President’s request or delay withholding and wait for additional guidance. Careful consideration has to be made on whether or not the employer is going to be liable if the employee is under-withheld when the tax payment is finally due. Due to the limited guidance on this subject, employers would be wise to educate their employees about the circumstances of deferring withholdings and to be cautious about spending the deferred tax and instead save this money until there is confirmation of the tax deferral.
For businesses, there is also a large administrative burden as it relates to both the cost and strategic implementation of the deferment. The administrative cost to businesses that do not usually shift withholding strategies and programming part-way through a year could be substantial. Further, without additional guidance, substantial costs could be incurred trying to implement strategies on repayment and education for employees.
It may be wise for businesses to wait for additional guidance based on the constitutionality of the executive action signed by the President. Generally, Congress has control over the collection and implementation of tax policy, and this is not a function that is usually handled solely by the executive branch. Any permanent tax cuts would likely need to be approved by Congress, which is another reason for a cautious approach by both small and large businesses before embracing this payroll tax holiday. A business could be well-served to wait for further guidance on how the government wants businesses and employees to repay the deferment and under what time frame. With that said, the Treasury Department is expected to release guidance about how the payroll tax suspension will work in the coming weeks.
It is anticipated that the executive action will be legally challenged in the coming weeks to consider whether the President had the power to do what he did. Regardless, it is imperative for businesses to take a cautious approach for both the business and its employees until further details emerge about this payroll tax holiday. In the meantime, if you have any questions regarding these executive actions or the impact they may have on your business, reach out to attorneys Scott Norcross (firstname.lastname@example.org / 216.736.7264) or Demetrius Robinson (email@example.com / 614.427.5749).