The executive order directs the Treasury Secretary to defer the withholding and payment of employees' 6.2% share of Social Security payroll taxes from September through December 2020 for those earning under $100,000 annually. However, there is uncertainty around the legality of this action. Employers are left in a difficult situation, as they must decide whether to implement the deferral by passing savings to employees and hoping Congress later forgives the taxes, or to ignore the order and risk noncompliance. Each option carries financial and legal risks for businesses. The order may exceed the authority granted by the law it cites and effectively waives taxes rather than deferring them.

1. O
n August 8, President Donald Trump signed four
Executive Orders, one of which addresses a
federal payroll tax holiday that he has sought to
have included in any new coronavirus pandemic relief
legislation. The President’s order is in response to the
absence of movement by Congress on an additional
stimulus package. The new order defers the withholding,
deposit and payment of the employee’s share of federal
OASDI (Social Security) payroll taxes (6.2%) from Sept.
1, 2020 through Dec. 31, 2020, on wages of employees
whose annualized income is “generally” less than
$100,000. While some have questioned President
Trump’s legal authority to take this action, employers are
placed in a precarious and potentially costly situation
regardless of the legal outcome.
The Executive Order
The executive order accomplishes the payroll tax
holiday through the exercise of the President’s disaster
declaration authority under Internal Revenue Code
Section 7508A. This law allows the Secretary of the
Treasury to defer tax filing and payment due dates for up
to one year. Importantly, this law does not authorize the
outright waiver of tax filing or payment obligations. As
the withholding obligations of employers will eventually
come due, the impending burden of such obligations may
compel Congress to forgive the deferred payroll taxes. The
order specifically directs the “Secretary of the Treasury
[to] explore avenues, including legislation, to eliminate
the obligation to pay the taxes deferred pursuant to the
implementation of this memorandum.” To date, neither
Democratic nor Republican members of Congress have
embraced President Trump’s desire for a payroll tax
holiday, which leaves the prospects uncertain for the
eventual forgiveness of these payroll taxes.
Potential Legal Hurdles for the Executive Order
There also is some uncertainty about the legal basis to
order a payroll tax holiday in this manner. Section 7508A
grants the Treasury Secretary the authority to, among
other things, defer “payment of any income, estate,
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2. gift, employment, or excise tax or any installment thereof
or of any other liability to the United States in respect
thereof” (emphasis added). This provision has rarely
been interpreted as broadly as it would need to be in
order to invoke a payroll tax holiday. Section 7508A has
been invoked nationwide only once, to delay the tax filing
and payment deadline this year to July 15, 2020. The
Treasury Secretary did not institute the payroll tax holiday
using Code Section 7508A on that occasion, but instead
delayed income, estate, trust, and gift tax filing and
payment obligations.
The potential legal challenge with the type of payroll tax
holiday in the executive order is that it pertains to the
withholding obligation of an employer, and therefore
does not directly apply to the amounts remitted to
employees. If an employer passes the “savings” from
not withholding the employee’s share of payroll taxes
to its employees, it will not be possible to subsequently
withhold the tax on those wages. As a result, this could
be seen as rendering the putative deferral as effectively
being a waiver — something that is not authorized under
Section 7508A.
And of course, with the election right around the corner,
the legality of the executive order is becoming a political
hot topic.
Employer Options in Response to the
Executive Order
The Coronavirus Aid, Relief, and Economic Security
(CARES) Act previously established a payroll tax
holiday for the employer’s share of Social Security
taxes through Dec. 31, 2020. It is the deferral
of employee’s share of Social Security payroll taxes
under the executive order that places employers in
a precarious situation. If we assume that the intent
of the executive order is to put more money into the
hands of employees immediately, then employers have
to make difficult choices with little certainty as to the
outcome. In order for employers to implement the
intent of the payroll tax deferral and still ultimately be
free of adverse consequences, employers must gamble
that Congress will eventually act to forgive the deferred
payroll taxes. Trying to divine the future in this manner
is a no-win situation. Consider an employer’s choices in
these circumstances:
1. The employer assumes that Congress will
eventually act by waiving the deferred payroll
taxes, and implements the payroll tax holiday
by passing the benefits on to employees. If
Congress later fails to act, then the employer
would either have to claw back money from
employees or use its own money to pay the
employee’s share of payroll taxes (on top of the
gross pay already remitted). And because this
would be compensation, as well, the employer
would have to gross-up the amount and withhold
more payroll taxes on that payment.
2. The employer could withhold the tax but not
pay it to the government, instead using it as
an interest-free loan. This would defeat the
purpose of the executive order as it would
deny any benefit to employees, and could
have potential negative public relations
consequences because the employer effectively
retains its “employee’s money.”
3. The employer could withhold the tax and remit
it to the government, effectively ignoring the
executive order altogether. Not only would this
deny any benefit to employees, it would position
the employer itself in potential noncompliance
with a presidential executive order.
Furthermore, in the event the potential executive order
is found to lack legal authority, the IRS could assess
a Trust Fund Recovery Penalty (TFRP) for a failure to
withhold. The TFRP imposes a 100% penalty on persons
responsible for withholding certain taxes, including
employment taxes. This could be particularly harsh on
businesses that are forced to shut down between the
time the executive order is in effect and the time it is
determined to be illegal. “Responsible persons” who
tried to comply with the executive order could then find
themselves subject to the TFRP, even though they tried to
comply with the law while their now-defunct business was
operating. The executive order directs that the deferred
amounts shall be “deferred without any penalties,
interest, additional amount, or addition to the tax,” which
could diffuse the penalty concern if this part of the
executive order is found to be legal.
Final Thoughts
Employers must proceed with caution and carefully
evaluate options concerning any payroll tax holiday
implemented via executive order. Each of the various
options comes with its own risk and potential
consequences. The only option that comes with no
potential adverse consequences requires an employer to
assume that Congress will enact future legislation. For
more information concerning the potential executive order
and its impact on your business, please contact us.
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