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PILLA TALKS TAXES - Featured Article(s)
_________________________________________ 

DEFERRING SOCIAL SECURITY AND MEDICARE PAYMENTS
- THIS IS NOT A TAX CUT
Making Sense of the President’s Executive Action

 

On August 8, President Trump instituted four executive actions in the ongoing battle against COVID-19. One of the four was a memorandum instituting a deferment on the collection of payroll taxes of certain employees. There is a great deal of confusion about what this means. Let’s break this down to get a detailed understanding of what’s going on here. 

Background 

The executive action drawing the attention is that related to the payment of withholding and employment taxes. The action declares that the Treasury Secretary is directed to “defer” an employer’s obligation to “withhold, deposit, and pay” Social Security and Medicare taxes from the paychecks of certain employees. See: Memorandum on Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster, Presidential Memoranda, August 8, 2020, §2. 

The employees to whom this action applies are those making less than $4,000 on a bi-weekly basis, or no more than $104,000 per year. Ibid, §2(b). 

The deferral applies only to payroll taxes due on wages paid from September 1 through December 31, 2020. An employee bears a Social Security and Medicare tax burden equal to 7.65% of wages. Thus, a person earning the max of $104,000 annually will see an increase in take-home pay of about $2,560 over the period during which the directive is in effect. 

This is Not a Tax Cut 

Let’s be clear on what this is not. It is not a tax cut. Neither is it a tax rebate. It is simply a temporary “deferral.” The deferred taxes become payable as of January 1, 2021. Thus, the employee still owes the employment taxes that were not withheld beginning September 1 through December 31. The order is silent as to exactly when and how the deferred tax must be paid. 

Under ordinary circumstances, an employee who was paid compensation on which Social Security and Medicare taxes were not withheld must report those taxes on a separate form filed with the tax return. That form is IRS Form 8919, Uncollected Social Security and Medicare Tax on Wages (reproduced below). Since payroll taxes subject to the President’s directive are the obligation of the employee, anyone who had their taxes deferred under this program will be personally responsible for filing Form 8919 with their 2020 tax return and paying the taxes that otherwise would have been withheld. 

It is an Interest Free Loan 

Though you get an increase in your take-home pay up to $2,560 (max), you don’t get to keep the money. It must be paid back to the IRS effective January 1, 2020. However, section 2(b) of the memo states that the amounts deferred are deferred “without any penalties, interest, additional amount, or addition to the tax.” 

So it is clear that this is merely a penalty- and interest-free loan from the government. The loan is due and payable after December 31, 2020, and, it seems to me, must be paid no later than April 15, 2021, which is the due date of the 2020 tax return. There is no suggestion in the memo or IRS guidance issued as of this writing that the deferment goes beyond April 15, 2021. 

Don’t Bet on Forgiveness 

It is also true that the memo makes no attempt to claim that the taxes deferred either are or will be forgiven in the future. I rather doubt the President has the constitutional authority to issue such an order. 

Instead, section 4 of the memo instructs the Treasury to “explore avenues” that might lead to the “eliminat[ion] of the obligation to pay the taxes deferred.” What may be such avenues? 

The IRS already has the statutory authority to compromise (forgive) delinquent tax debts under code section 7122. But that requires a taxpayer seeking to compromise to comply with substantial financial disclosure requirements and limitations. I believe it would require deliberate Congressional authority to bring these specific employment tax debts under the sweep of section 7122. Short of that, a person would have to meet all existing Internal Revenue regulations and guidance in order to achieve a compromise of delinquent liabilities.

Who Owes The Taxes? 

If no plan of forgiveness is put into effect, who owes the deferred taxes? Foundationally, those taxes are owed by the employee who earned the income. That is why the employee is responsible for filing Form 8919 with his return. 

But additionally, and what may come as a surprise to many unsuspecting employers, is that the employer is equally liable for the tax. Code section 3403 dictates that the employer is legally responsible and liable for the payment of all employment taxes, even if the money was paid to the employees. As it stands of course, the statute makes no exception for taxes deferred under a Presidential Memorandum. Therefore, if the employee does not pay the tax, the IRS certainly can—and I expect will—look to the employer for collection. 

And for corporate entities that otherwise find themselves in trouble with the IRS, the agency can be expected to use the Trust Fund Recovery Penalty, under code section 6672, to make individual corporate officers or employees personally responsible for the unpaid taxes. 

Both employees whose Social Security and Medicare taxes were not withheld, and employers who did not withhold, might wake up on April 15, 2021 to discover they owe taxes to the IRS. The joy of receiving higher take-home pay for four months might well become the misery of dealing with IRS enforced collection. 

The President’s Authority 

One might ask what the President’s authority is to issue an executive order suspending the operation of federal tax law. Well, to start with, this directive is not an executive order at all. It does not purport to be an executive order. Rather, the directive is styled as a “Presidential Memorandum.” It appears to be in the nature of mere suggestions and expressed wishes—rather than orders—to a federal agency with regard to law enforcement. 

An executive order is the means by which a president instructs federal agencies how to carry out their duties. The key element of an executive order is that it must be consistent with legal parameters already set by Congress and the Constitution. That is to say, executive orders cannot make law; they merely express the president’s direction on how to enforce the law, per his charge under Article II of the Constitution. That article provides that the president “shall take Care that the Laws be faithfully executed.” 

A Presidential Memorandum, on the other hand, carries no such force. Indeed, in section 5(c) of the memo, it provides that the memo “is not intended to, and does not, create any right or benefit, substantive or procedural, enforceable at law or in equity by any party against the United States” or any of its officers, agencies or employees.” 

The bottom line is that it appears to me that the Presidential Memorandum is not worth the paper it is written on when it comes to substantive tax relief. 

To Withhold or Not to Withhold 

In light of the forgoing, the question for employers is, starting September 1, should you continue to withhold on your employees as you have in the past, or do you subscribe to the deferral period and give your employees 7.65% larger paychecks until the end of the year? 

Here are some factors to consider in making the decision. 

1. It is important to understand that the memo does NOT apply to federal or state income taxes. The deferral applies only to the employees’ share of Social Security and Medicare taxes. Nor does the deferral apply to the matching Social Security tax imposed on the employer. So to be clear, we are talking only about the employees’ share of employment taxes under code sections 3101 and 3201, per section 2 of the Memo. 

2. If you elect to not withhold the taxes, make triple sure your employees know and understand that this is not a tax cut or a tax rebate. This is simply a deferral and they are responsible for paying the taxes after January 1, 2021, under terms and conditions that we don’t yet fully understand. Moreover, the deferral is not permanent. It ends December 31, 2020. 

3. The deferral is not mandatory; thus employees have the choice to opt out if they don’t wish to incur a tax liability on the deferred withholding. Exactly how that might occur is not clear at this time but I certainly would not force my employees to accept the deferral, and thus, a guaranteed future tax debt. 

4. You as the employer need to understand that if the employee fails to pay the taxes, you are liable for the tax. Nothing in the Presidential Memorandum suspends or otherwise undermines the scheme of liability established under code section 3403. Even if your business is a corporation, the IRS could use the Trust Fund Recovery Penalty to hold you personally liable for the unpaid taxes. 

5. The IRS cannot force employers to stop withholding. Even if your employees wish to take part, you as the employer can choose to continue withholding and depositing just as you have always done. In this scenario, you absolutely avoid any liability for an employee’s potential failure to pay. And while the employees don’t get more money in their checks, they don’t owe the IRS money after December 31 either.

 

This is an article from the September 2020 issue of Pilla Talks Taxes Newsletter.  

 *Subscribers to Pilla Talks Taxes are able to read complete articles as well as the rest of the newsletters 
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I've been reading up on the deferment of Social Security and Medicare. 
Please
tell Dan his article on deferring SS and Medicare was by far the best 
and most complete article on the subject I have seen…Great job!!!   Dave N. CPA, CTRS Fircrest, Washington

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ARTICLES FOUND IN THE LATEST 

PILLA TALKS TAXES ISSUE:



September 
2020 

  DEFERRING SOCIAL SECURITY AND MEDICARE PAYMENTS

- THIS IS NOT A TAX CUT

Making Sense of the President’s Executive Action


FORM 8919


“SPEAK INTO THE PEN”

Tax Practitioners Beware: 
The IRS’s Orwellian Scheme Development Center


STATE AND LOCAL GOVERNMENTS LOOKING FOR
CREATIVE WAYS TO STEAL MORE MONEY
No, We are NOT All in this Together
- Portions reprinted from Daily Tax News

 

 

 

 

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