Presidential Action on Payroll Tax Deferral Creates Uncertainty

August 17, 2020 | Kristine A. Tidgren

Update: On August 28, 2020, IRS issued guidance on this new program. Read about it here.

After the breakdown of COVID-19 stimulus ("Phase IV") negotiations between Democrats and the Administration, the President took executive action on August 8, 2020, designed to assist those impacted by COVID-19 disruptions. Many questions remain regarding the details and implementation of these actions, which are detailed below.

Memorandum on Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster

In this Memorandum, the President directed the Secretary of the Treasury to defer the withholding, deposit, and payment of the employee’s old-age, survivors, and disability insurance (6.2 percent) paid during the period of September 1, 2020, through December 31, 2020. This deferral would apply to employees whose biweekly wages are less than $4,000 ($104,000/year).  According to the Memorandum, amounts deferred would not be subject to interest or penalties. The Memorandum states that the Secretary of the Treasury “shall explore avenues, including legislation, to eliminate the obligation to pay the taxes deferred pursuant to the implementation of this memorandum.” Without Congressional action, however, these funds will become due at some point down the road.   

Touted as putting more money in Americans’ pockets, the Memorandum has caused concern and confusion among many employers. To date, Treasury has not provided the guidance necessary to implement the program. Many questions exist: Will employees and/or employers be given an option to opt in or opt out of this deferral? Could employers be liable for funds deferred, but unpaid, at a future date? Is the income limit for the deferral a “cliff” (i.e. if an employee earns $4,001 per week is the employee wholly ineligible for the deferral)? And those are just the basic questions. Actual implementation would involve many more details such as employee notice requirements, how to handle an employee with more than one job, or how the actual repayment would work. And retooling payroll systems on the fly is certainly a complicating factor.

Although the Memorandum states that deferral may begin September 1, employers should continue remitting employee payroll taxes until Treasury issues the required guidance. Only at that point can the employer reasonably determine its options.  

Note: The CARES Act deferred the payment of the employer’s portion of the old-age, survivors, and disability insurance (6.2 percent) through December 31, 2020. For those who defer, these taxes must be repaid in two equal installments, one due by December 31, 2021, and the other due by December 31, 2022.  

Memorandum on Authorizing the Other Needs Assistance Program for Major Disaster Declarations Related to Coronavirus Disease 2019

CARES Act supplemental unemployment benefits of $600 per week ended July 31. One of the main points of contention in stimulus negotiations has been an extension of these benefits. Democrats have wanted $600/week in supplemental benefits in any new package, while Republicans have proposed no more than $400/week (the original proposal was $200/week).  

In this August 8, Memorandum, the President authorized FEMA to use Stafford Act disaster funds to provide up to $44 billion in funding for “Lost Wage Assistance.” These benefits would end when the Disaster Relief Fund dips below $25 billion or on December 6, whichever happens first.

Under this program, money would be paid to states to implement the program if:

  • The Governor agrees to a 25 percent cost share AND
  • The Governor agrees to administer the program.

Eligible claimants under the Memorandum are those receiving at least $100 per week in unemployment compensation benefits. Under the CARES Act anyone receiving $1/week was eligible for the $600/week supplemental benefit. This program would also require a self-certification that the applicant is unemployed or partially unemployed because of COVID-19 disruptions.

Although the Memorandum states that it would provide up to $400/week in supplemental unemployment benefits, $100 of that amount would have to be contributed by the states.  The Department of Labor clarified on August 11 that states can elect to receive $300 and not make the extra $100 contribution. The 25 percent requirement will be satisfied through the state’s payment of existing unemployment funds. Language in the Memorandum does suggest a retroactive payment to cover the week beginning August 1.

The program will end if legislation is passed. States that opt in must implement the program rapidly. Around 30 states, including Iowa, have elected to participate, although states must reprogram their systems to include the Lost Wages Assistance benefits. As of August 26, Iowa has not begun processing applications for the additional assistance.

Executive Order on Fighting the Spread of COVID-19 by Providing Assistance to Renters and Homeowners

The CARES Act put in place a 120-day eviction moratorium for those who receive federal housing assistance or live in a residence with a federally-backed mortgage. That protection ended July 24, 2020, although a 30-day notice provision effectively extended the relief into August. This Executive Order states that it seeks to minimize residential evictions and foreclosures, but doesn’t actually order relief. Instead it directs the Department of Health and Human Services and the Centers for Disease Control to determine whether measures to halt evictions for failure to pay rent are necessary to prevent the spread of COVID-19. It also directs the Secretary of the Treasury and the Department of Housing and Urban Development to identify any federal funds to temporarily assist those struggling with monthly mortgage or rent. Likewise, the Director of the FHFA is instructed to look for existing resources to prevent evictions and foreclosures.

Memorandum on Continued Student Loan Payment Relief During the COVID-19 Pandemic

This Memorandum directed the Department of Education to continue the suspension of student loan payments and the waiver of interest on federal student loans through December 31, 2020.