September 25, 2020

Volume X, Number 269

September 25, 2020

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September 23, 2020

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The President Issues an Order: Should I Stop Withholding Payroll Taxes?

On August 8, 2020 President Donald Trump issued four different executive actions in response to the breakdown in negotiations with congressional leaders over the next wave of economic stimulus programs designed to aid workers and the economy in light of the COVID-19 pandemic.  One of those actions is designed to provide economic relief to certain workers by instituting a moratorium on the collection of payroll taxes.  Since the action was issued there has been much confusion among the employer community as to what they should be doing when processing employees’ paychecks.

To clarify, contrary to widespread reports in the popular media, the President did not issue an Executive Order. What he did do is issue a Memorandum to the Secretary of the Treasury titled “Deferring Payroll Tax Obligations in Light of the Ongoing Covid-19 Disaster” (“The Memo”).  Of critical importance to employers is the fact that the steps laid out in the Memo will not require employers to do anything before September 1, 2020.  Therefore, until September 1 or unless there is additional guidance or new legislation passed in the interim, employers should continue to withhold and transfer to the government income and employment taxes. It is quite likely that between now and September 1 there will be additional guidance from the Internal Revenue Service or perhaps even new legislation that will provide further guidance on what to do after September 1. 

What The Memo does is instruct the Secretary of the Treasury  to use his authority pursuant to 26 U.S.C. 7508A to defer the withholding, deposit, and payment of the tax equal to 6.2 percent of wages used to fund social security from the period of September 1, 2020, through December 31, 2020.  The deferral would only apply to workers whose wages or compensation payable during any bi-weekly pay period generally is less than $4,000, calculated on a pre-tax basis, or the equivalent amount with respect to other pay periods.  Thus, the deferral would not apply to workers making more than $104,000 per year.

What is critical for both employers and employees to note is that the President’s memo does not eliminate the obligation of the employee to pay the tax, it just defers it. Until there is further guidance from the IRS or other governmental entity, it would appear that an employer who stops withholding could be doing a great disservice to its employees by placing them in a position where they have a future debt to the IRS and no funds to pay it.  In addition, it’s not clear how the wage cut-off is determined, e.g., if someone who normally makes less than $4,000 but ends up grossing wages above $4,000 for one or more pay periods, is withholding required for the periods they make more than $4,000? It is not clear if the deferral would be mandatory or if employees could elect to continue paying the tax so that they are not stuck with a future tax liability. 

Should the IRS or Congress take further action to forgive the deferred taxes (which the President seems to think the IRS has the authority to approve, as reflected in The Memo), then employees and employers would see a real benefit.  It is also important to note that the President has no authority to negate state and local income taxes, requiring employers to continue to withhold and pay those taxes.

There remains significant confusion surrounding this issue. Some political pundits claim the President’s Memo is a political strategy designed to force a more comprehensive deal on economic reforms and stimulus with Congress.  For this week and next, continue to withhold taxes and keep your eyes peeled on Washington and the IRS website for further guidance.

© 2020 Foley & Lardner LLPNational Law Review, Volume X, Number 227

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About this Author

Leigh C. Riley, Foley Lardner, Executive Compensation Lawyer,
Partner

Leigh Riley is a partner and business lawyer with Foley & Lardner LLP. She focuses her practice on employee benefits and executive compensation. In the area of employee benefits, Ms. Riley concentrates on welfare plans, including COBRA and HIPAA privacy rules, and retirement plans, including nonqualified deferred compensation arrangements. In the area of executive compensation, she counsels both private and public companies on establishing and administering all types of executive compensation programs, including stock options, restricted stock, phantom stock...

414-297-5846
Lawrence W. Vernaglia, Health Care Attorney, Foley Lardner Law Firm
Partner

Lawrence Vernaglia is a partner and health care lawyer with Foley & Lardner LLP and serves as chair of the firm’s Health Care Industry Team – named “Health Law Firm of the Year” for three of the past four years on the U.S. News - Best Lawyers® "Best Law Firms" list. Mr. Vernaglia represents hospitals, health systems and academic medical centers and a variety of other health care providers. Mr. Vernaglia's practice involves regulatory and transactional matters, including Medicare/Medicaid reimbursement compliance advice and appeals; mergers, acquisitions and financings; state regulatory issues including licensing, change of ownership, and CoN/DoN; survey/certification appeals; fraud & abuse/Stark law analyses; managed care contracting; and general corporate and business planning in health care. He runs strategic planning programs for senior management and governing boards. He regularly serves as local counsel on health care transactions in New England for multi-state projects.

617-342-4079
Mark J. Neuberger, Of Counsel, Miami Lawyer, Foley Lardner, Non profit Attorney
Of Counsel

Mark J. Neuberger is of counsel and a litigation lawyer with Foley & Lardner LLP. His practice involves the representation of management in all areas of employment law, including general labor and employment guidance to clients. He regularly represents clients in the health care, hospitality, manufacturing and not-for-profit industries. He is a member of the firm’s Labor & Employment and Private Equity & Venture Capital Practices as well as the Health Care Industry Team. Mr. Neuberger also serves on Foley’s national Pro Bono Legal Services Committee.

305-482-8408