Presidential Memorandum on Payroll Tax Deferral Creates More Questions Than Answers


On August 8, 2020, President Trump issued the Memorandum on Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster (the “Presidential Memorandum”). This Presidential Memorandum addressed growing economic concerns amid the COVID-19 pandemic. However, many aspects and potential effects of the Presidential Memorandum are, as yet, unknown. Additionally, the Treasury Secretary has not yet issued any guidance on the implementation of the various facets of the Presidential Memorandum. This article provides an analytical overview of the Presidential Memorandum, which is subject to change as formal guidance becomes available.

1.  Overview and Background.

The Presidential Memorandum directs the Treasury Secretary to “use his authority pursuant to [Internal Revenue Code (“IRC”) section] 7508A to defer the withholding, deposit, and payment of the tax imposed by [IRC section] 3101(a) . . . on wages . . . paid during the period of September 1, 2020, through December 31, 2020,” subject to certain conditions. The two conditions set forth in the Presidential Memorandum are: (i) first, the payroll tax be deferred without application of any penalties, interest, additional amount, or addition to the tax; and (ii) second, this deferral is only applicable to an employee whose wages 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.” When annualized, this limit becomes $104,000.

Unfortunately, the Presidential Memorandum creates uncertainties regarding its implementation, as well as legal questions for employers. Without further guidance, employers face a tough choice whether to withhold the deferred payroll taxes from employees’ wages. Moreover, employers may also face significant employee and public relations issues if the employer chooses to continue withholding the payroll taxes in question. Perhaps due in part to the nature of the press coverage around the Presidential Memorandum, employees may expect to see this payroll tax deferral passed through to their paychecks. As a result, employers who choose not to suspend withholdings may raise the ire of their employees. Adding to the confusion, at a press conference following the issuance of the Presidential Memorandum, President Trump stated, “I plan to forgive these taxes and make permanent cuts to the payroll tax.”

2.  Cited Authority within the Presidential Memorandum.

While the Presidential Memorandum is being widely referred to in the media as an “executive order,” the document is actually a similar type of executive document known as a “presidential memorandum.” Presidential memoranda have the force of law and generally direct the action to be taken by specific government agencies or to begin a regulatory process. Unlike executive orders, however, presidential memoranda need not be published in the federal register nor cite the specific constitutional or statutory basis for the memoranda. (44 U.S. Code § 1505; Executive Order 11030)

The Presidential Memorandum cites, as for the statutory basis for the actions the President has directed the Treasury Secretary to take, IRC section 7508A. Section 7508A permits the Treasury Secretary to postpone the tax liability of a taxpayer for up to one year, if the Secretary determines that the taxpayer has been affected by a federally declared disaster, as defined by IRC section 165(i)(5)(A). In March 2020, President Trump declared the COVID-19 pandemic to be a nationwide emergency. Thereafter, the IRS stated that “the COVID-19 pandemic is a ‘federally declared disaster,’ as defined by section 165(i)(5)(A) of the Code.” (IRS COVID-19-Related Tax Credits: Special Issues for Employees and Additional Questions FAQs, Question 58.)

Accordingly, the Treasury Secretary has authority to defer the payroll taxes, as directed in the Presidential Memorandum. That being said, the Treasury Secretary does not have authority to forgive the taxes in question, which must be done by legislation. As the authority of the Treasury Secretary arises under existing law (such as IRC section 7508A) and not from the Presidential Memorandum itself, the Treasury Secretary has wide discretion to implement the deferral based on IRC section 7508A.

3.  Not All Payroll Taxes Can Be Deferred.

As drafted, the deferral under the Presidential Memorandum only applies to certain payroll taxes (the “Deferrable Taxes” or “Deferred Taxes”), most notably social security taxes. The deferral does not apply to Medicare taxes nor the additional Medicare tax (note that the additional Medicare tax withholding would likely not fall within the scope of Deferrable Taxes due to the wage limitation).

It is also critical to note that, based on the current authority, the Deferrable Taxes only include the employee portion of the applicable taxes and does not apply to the employer portion of the applicable taxes on the wages subject to deferral.  However, the CARES Act provided that an employer may choose to defer the deposit and payment of the employer portion of the Social Security tax otherwise required to be made for the period beginning March 27, 2020 and ending December 31, 2020.

4.  Only Applicable to Employees Earning Less Than $4,000 Bi-Weekly.

The deferral under the Presidential Memorandum only applies to employees whose wages are generally less than $4,000 (pre-tax) per bi-weekly pay period. When annualized, this applies to employees whose annual wages are less than $104,000 (pre-tax). That being said, the Presidential Memorandum creates some ambiguity in this regard due to the use of the term “generally,” which suggests that the deferral may be available for certain employees whose wages exceed the aforementioned limits. One such instance may be the case of an employee whose wages are “generally” within the threshold, but who receives an annual or quarterly bonus which raises the employee’s pre-tax wages above the annualized $104,000 limit.

Another crucial question without a clear answer is whether pre-tax deductions such as contributions to a qualified retirement plan would be excluded from the employee’s pre-tax wages for purposes of the $104,000 annualized deferral threshold. Without further guidance, the existing rules regarding the excludability from wages of FICA tax amounts, of which the Deferred Taxes are a part, may be informative. Based thereon, it seems that some but not all such pre-tax contributions may be excluded. Qualified retirement plan contributions likely would not be excluded because such contributions are still considered wages for purposes of FICA taxes, though some pre-tax deductions such as contributions to health plan premiums and certain flexible spending accounts, which are excluded from wages for FICA purposes, may be excluded.

For employers who reduced employee wages in response to the economic conditions brought on by COVID-19, there is even more uncertainty. This is because as of yet there is no guidance on how the wage limitation applies to formerly highly paid employees whose salaries or wages were reduced (whether by the employer or voluntarily) to an amount below the applicable threshold due to the pandemic.

5.  Payroll Tax Deferral Only.

The Presidential Memorandum directs the Treasury Secretary to “explore avenues, including legislation, to eliminate the obligation to pay the taxes deferred pursuant to the implementation of this memorandum.” This language acknowledges limitations of the Treasury Secretary’s power under section 7508A merely to delay and not to eliminate the payment of tax. The IRC does not grant power to the Treasury Secretary, or the President, to eliminate (or reduce) the amount of the Deferrable Taxes.

For this reason, legislation is the only viable method to eliminate the Deferrable Taxes.  Unfortunately, this creates a situation for which legal analysis alone cannot provide a concrete solution. In many respects, it is a business decision for each employer which may be influenced by many factors, including whether the employer believes Congress will enact legislation eliminating the payment obligations for the Deferrable Taxes, or whether the employer is willing to risk liability for the Deferrable Taxes, as discussed further below.  

6.  Deferral Timelines.

The Presidential Memorandum applies to wages paid from September 1, 2020, through December 31, 2020 (the “Covered Period”), not wages earned during the Covered Period. Thus, wages paid during the Covered Period for services performed prior to the Covered Period would apparently be subject to deferral. On the other hand, wages paid after the Covered Period (even if earned during the Covered Period) would not be subject to deferral.

The Presidential Memorandum does not state exactly when the Deferred Taxes must eventually be withheld, deposited, or paid. These details will need to be provided through further guidance. As noted above, IRC section 7508A allows the Treasury Secretary to set a period of up to one year which can be disregarded in determining timely payment of any employment tax. The implication of this is that the Treasury Secretary may issue guidance postponing the payment deadline of the Deferrable Taxes for as long as one year after the date on which such payment would ordinarily be due. Because the payment obligations would arise on a rolling basis, the postponed payments could be delayed to as late as August 2021 for the earliest of the Cover Period wages, and as late as January 2022 for the latest of the Covered Period Wages.

7.  Employers Liability for Payment of Taxes.

Under current Treasury Regulations, employers are liable for the taxes imposed under IRC section 3101, regardless of whether the tax is collected from employees. The Presidential Memorandum does not absolve employers of this liability, which arises under IRC section 3102(b) for payment of the tax imposed under IRC section 3101.

This means that, despite allowing employers to defer the withholding of the Deferrable Taxes, the Presidential Memorandum does not modify or supersede existing law and the employer remains liable for the taxes. This liability is not lessened even if the employer is unable to collect those taxes at a later time from employees. This creates a risky situation for employers who defer withholding if, for example, Congress does not forgive the deferred taxes and the employer is unable to recoup the Deferred Taxes from employees whose employment is terminated or are otherwise unable to repay the employer.   

As with many tax related issues, one complication often leads to another and the Deferrable Taxes under the Presidential Memorandum are no exception. For example, if an employer elects not to withhold the Deferrable Taxes and those Deferred Taxes are not eliminated or forgiven by Congress and the employer is unable to collect the Deferred Taxes from the employee, the employer may have no choice but to pay the Deferred Taxes on behalf of the employee, thus creating a situation where the payment of the tax itself could constitute wages to the employee, resulting in the imposition of additional FICA taxes and federal income tax, which the employer may have to “gross-up.”

8.  Deferral is Optional.

The Presidential Memorandum does not impose a mandatory deferral of withholding on the Deferrable Taxes. In the absence of additional guidance from the Treasury Secretary, employers may choose to withhold and deposit the Deferrable Taxes as usual. Risk-averse employers may choose this course because the Presidential Memorandum does not absolve the employer of liability for the eventual payment of the Deferrable Taxes.

In addition, the lack of clarity on exactly which employees’ tax obligations may be eligible for deferral (based on the “generally” language discussed above) is another factor which may cause employers to continue withholding as usual until it is known whether Congress will act to forgiving the tax via legislation.

9.  Employer Public Relations Issues.

In general, IRC section 3102(b) provides indemnity to employers against employee claims for amounts of employee tax withheld by an employer and paid to the government. This means that employees likely have no meaningful legal recourse against employers who choose to continue withholding the Deferrable Taxes so long as the employer also continues to deposit the withheld taxes with the Treasury (as opposed to withholding the taxes and retaining them). In the event Congress forgives the Deferrable Taxes in question, there are various avenues for employees to recover the withheld amounts at a later time, such as filing refund claims using IRS Form 843, or insisting that the employer use the interest-free adjustment rules under IRC sections 6205 and 6413 to recover the previously deposited taxes, so that the employer may then pass them along to the employees.

10.  Conclusion.

While touted in the media as a “temporary raise” for employees, the truth of the Presidential Memorandum is much more complex. As discussed above, while it may yet provide some structured relief following the issuance of further guidance, as of the date of this article the Presidential Memorandum raises more questions for employers than it answers, and creates legal uncertainly with regard to its implementation and lasting effects.

Until and unless additional guidance is forthcoming, employers will face a tough choice whether or not to withhold the Deferrable Taxes from employees’ wages. Due to the serious legal and financial uncertainties, employers must balance potential economic and political risks with the practical considerations of employee morale.

This AALRR publication is intended for informational purposes only and should not be relied upon in reaching a conclusion in a particular area of law. Applicability of the legal principles discussed may differ substantially in individual situations. Receipt of this or any other AALRR publication does not create an attorney-client relationship. The Firm is not responsible for inadvertent errors that may occur in the publishing process.

© 2020 Atkinson, Andelson, Loya, Ruud & Romo



Back to Page

By scrolling this page, clicking a link or continuing to browse our website, you consent to our use of cookies as described in our Cookie and Privacy Policy. If you do not wish to accept cookies from our website, or would like to stop cookies being stored on your device in the future, you can find out more and adjust your preferences here.