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Payroll Tax Deferral: Uncertainties Remain One Week Prior to Start of Applicable Period

On August 8, 2020, President Trump signed an executive memorandum (the Memo) directing Treasury Secretary Mnuchin to issue guidance deferring the withholding, deposit and payment by employers of the employee portion of certain social security (and related railroad retirement) taxes imposed under sections 3101(a) and 3201(a) of the U.S. Internal Revenue Code of 1986, as amended (FICA Withholding Taxes). The Memo specifies that such deferral shall apply to wages and compensation paid for the period between September 1 and December 31, 2020 to employees who receive less than $4,000 of pre-tax wages and compensation on a bi-weekly basis ($104,000 on a yearly basis). The Memo further provides that no penalties, interest or additional amounts will apply to any FICA Withholding Taxes deferred, and directs Treasury Secretary Mnuchin to explore “avenues, including legislation,” to provide for forgiveness of those deferred FICA Withholding Taxes.

Although the deferral period specified in the Memo begins in approximately one week, no Treasury guidance has been issued implementing the policy set forth in the Memo. As a result, neither the Memo nor any Treasury authorities currently provides a basis for employers to defer the employee portion of any such FICA Withholding Taxes.

Moreover, significant uncertainties remain regarding how any deferral under the Memo will be effected in the absence of any implementing Treasury guidance. For instance, although Treasury Secretary Mnuchin reportedly said in an interview on August 12 that any such deferral will be optional for the employer and not mandatory, it is not clear how any such election is to be made. The timing and manner of collection of any FICA Withholding Taxes that are deferred and will be due in 2021 (absent further action), including whether an employer will be liable for any such amounts that an employee fails to repay, also need to be confirmed. Moreover, Treasury’s ultimate authority to effect any deferral of FICA Withholding Taxes under the statutory provisions cited by the Memo is itself questionable and subject to legal challenge.

These and other concerns have caused a number of prominent interest groups, including the American Staffing Association and the U.S. Chamber of Commerce (along with over 30 other organizations), to send letters to Treasury officials, as well as to Senate Majority Leader Mitch McConnell and House Speaker Nancy Pelosi, urging them to clarify and/or go beyond the scope of the Memo. However, no such clarification has emerged. Given the number of questions that remain unresolved, and that may exist even following any Treasury guidance implementing the Memo, the more prudent course of action for employers at this time is probably not to take any action to try to implement the deferral of FICA Withholding Taxes. Even once any such Treasury guidance is issued, employers should consult with their tax advisors regarding its implementation, and material considerations surrounding it, prior to altering their current FICA Withholding Tax practices to effect a deferral.

© 2020 Faegre Drinker Biddle & Reath LLP. All Rights Reserved.National Law Review, Volume X, Number 238
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About this Author

Stephen Hamilton, Tax Lawyer, Drinker Biddle
Partner

Stephen D. D. Hamilton assists clients with the tax aspects of major business transactions. He focuses on helping clients avoid tax pitfalls and finding creative and practical structural solutions to their tax problems.

Steve's practice includes mergers and acquisitions, representing both buyers and sellers, both public companies and owners of closely held businesses, in numerous transactions every year. He has facilitated many substantial transactions by enabling the parties to achieve significant tax savings with his tax...

215-988-1990
Sean M. FitzGerald Tax Lawyer Drinker Biddle Law Firm
Partner

Sean M. FitzGerald handles domestic and cross-border transactional tax matters. Sean provides best-in-class tax advice critical to the success of a corporate practice, and advises on corporate transactions and investment management. His work spans M&A, partnership tax, international tax, investment fund work and finance.

Sean’s considerable experience includes advising clients on the structuring and implications of, as well as the drafting and negotiation of the relevant documentation related to, a broad array of tax-free and taxable domestic and...

202-230-5333
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