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August 10, 2020Analysis of Executive Action re: Payroll TaxesExecutive Action (EA)Over the weekend, the President directed Treasury Secretary Mnuchin to use his authority under section 7508A to defer the withholding, deposit, and payment of certain employee payroll taxes under sections 3101(a) and 3201. The order would apply only to: (i) wages or compensation paid during the period from September 1, 2020 through December 31, 2020; and (ii) an employee whose pre-tax wages or compensation payable during any bi-weekly pay period “generally is less than $4,000.” Any amounts deferred would not be subject to any penalties, interest, additional amount, or addition to the tax. The Secretary is also directed “to explore avenues, including legislation, to eliminate the obligation to pay the taxes deferred.” Applicable law:Section 7508A: In the case of a federally declared disaster, the Secretary “may specify a period of up to 1 year that may be disregarded” in determining whether certain acts described in section 7508(a)(1) “were performed within the time prescribed therefor.” Such period may also apply in determining the amount of any interest, penalty, additional amount, or addition to the tax for periods after such date, and the amount of any credit or refund. Section 3101: A payroll tax equal to 6.2 percent is imposed on wages received by employees for old-age, survivors and disability insurance (OASDI).Section 3102 (a), (b): (a) The tax imposed by section 3101(a) shall be collected by the employer of the taxpayer, by deducting the amount of the tax from the wages as and when paid. (b) Every employer required so to deduct the tax shall be liable for the payment of such tax.Section 6672(a): ?Personal liability is imposed on “responsible persons” in the amount of the unpaid trust fund taxes upon any person who is required to collect, account for, and pay over such taxes and who willfully fails to do so. ?Analysis:Section 7508A provides the authority only to extend “the time prescribed” (i.e., deadlines) for performing certain acts for up to one year. It does not provide authority to turn off the obligation to perform those acts.It is not clear whether 7508A applies when the obligation to perform the act is tied to another action, rather than a prescribed time. In this case, the obligation to withhold under section 3102(a) is tied to making the wage payment, not to a prescribed time. By contrast, the remittance of the withheld tax must be sent by a prescribed time.Thus, the better reading of the statute seems to be that the remittance by the employer of any withholding may be deferred, but that the act of withholding from an employee’s wages may not be.This makes sense as a policy matter as well, as there are several problems with withholding on a deferred basis, including: (i) employees may no longer work for the employer; (ii) employees may have already paid the tax for which withholding was deferred; and (iii) catch-up withholding at a later date may impose a strain on employees.An alternative reading of the statute would say that the withholding obligation may be delayed up to one year from the date of the wage payment.Implications – Various scenarios:Relying on the EA, employer opts not to withhold and remit tax; however, despite the EA, the obligation to withhold is not deferred (i.e., better reading of the statute applies).Employer is liable immediately for withholding tax, even though didn’t withhold. Unlikely to be able to recoup from employees from future, unrelated wage payments.Responsible person may also be liable for the tax, unless reliance on the EA is viewed as turning off “willfully.”Employee gets deferral benefit, but must come up with the cash subsequently to pay the tax (so may be unable to benefit from the liquidity).Relying on the EA, employer opts not to withhold and remit tax; withholding obligation is deferred (i.e., White House position -- alternative reading of the statute applies).Employer gets deferral on obligation for withholding tax, but must pay subsequently. Will they be able to recoup from employees from future, unrelated wage payments?Responsible person may still be liable for the deferred tax, unless reliance on the EA is viewed as turning off “willfully.”Employee gets deferral benefit of extra wages, but must come up with the cash subsequently to pay the actual tax liability (so may be unable to benefit from the liquidity).Because of uncertainty regarding withholding obligation under EA, employer opts to withhold, but defers remittance of tax.Employer gets deferral on payment of withholding tax, but probably has to “escrow” withheld amounts in order to ensure cash is on hand to pay the tax subsequently. Thus, only benefit is rate of return that can be earned on escrowed funds in the interim. Employee gets no benefit b/c withholding is not deferred. Employees may complain to employers because they expected to benefit from EA. Because of uncertainty regarding obligations under EA, employer opts for status quo by withholding and remitting tax currently with respect to all wage payments. No benefit to employer.No benefit to employee; employees may complain to employers because they expected to benefit from EA.What happens in these cases if Congress subsequently makes payroll tax deferral permanent?$4,000 biweekly limit is an imperfect limit; employees who receive large bonuses can have incomes well in excess of $100,000 in aggregate, but still be eligible for payroll tax deferral. It is not clear how the phrase “generally is less than $4,000” is meant to apply.Not clear there is authority to make the trust funds whole. ................
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