Special Tax Alert

Reprieve or Pitfall? The Executive Order on Employee Portion of Social Security Taxes

Kevin M. Jacobs, Managing Director

kjacobs@alvarezandmarsal.com

Logan Fassbender, Associate

August 13, 2020 / North America

On Saturday, President Trump issued four executive orders, one of which directs the Treasury Department to defer to use their authority to provide a grace period with respect to the withholding, deposit, and payment of the employee portion of Social Security taxes on wages paid for the period beginning September 1, 2020 and ending on December 31, 2020. The executive order is separate but could be viewed as a companion to the deferral of the employer portion of Social Security taxes that is provided by the CARES Act.[1] Because the executive order does not self-execute a grace period, we expect guidance in the near term. In the meantime, we felt it would be helpful to provide some of our insights, as well as some of our questions, regarding the executive order. 

The Executive Order is Requesting a Grace Period for Payment

The executive order requests the Treasury Department to provide a grace period for the employee portion of Social Security taxes. As a result, the upcoming guidance will amount to an interest-free loan, which raises a host of questions, including:

  • When will the interest-free loan be due?
  • Will the amount be due in a single installment or over multiple installments? Based on the criteria within the executive order, it is possible that the amount of the interest-free loan could exceed $2,000.
  • Traditionally, it is the employer’s obligation to withhold, deposit, and pay employee’s payroll taxes. Whose obligation is it to pay off the interest-free loan: the employer or the employee?
    • If it is the employer’s obligation, presumably the employer will withhold the amount due from the employee’s paycheck. However, what happens if the employee whose taxes is subsequently due no longer works for the employer? Alternatively, what if the amount due exceeds the full amount of the employee’s paycheck?
    • If it is the employee’s obligation, will they need to make a direct payment?

Additionally, it is worth noting that the grace period does not change the due date for the payment of taxes. Therefore, if the amount due is not timely paid by the end of the grace period, then the IRS may assess interest and penalties based on the due date of the payments…

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