President Signs Four COVID-19 Relief Orders, Including Deferral of Certain Payroll Tax Obligations

Alerts / August 12, 2020

Update: For our latest analysis on this topic, please read our alert, “Treasury Allows Employers That Choose Not to Withhold Employee Share of Social Security Taxes Pursuant to Presidential Memorandum to Collect and Pay Those Taxes in 2021” dated Aug. 31, 2020.

Four COVID-19 Executive Actions

After reaching a stalemate with congressional Democrats on Capitol Hill, the President on Aug. 8 signed four presidential actions, including a memorandum for the Secretary of the Treasury regarding “Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster." The other three relief orders (i) ask the Secretary of Education to waive student loan payments and interest on Department of Education loans through Dec. 31, 2020; (ii) ask the Secretary of Health and Human Services and the director of the Centers for Disease Control and Prevention to take action to temporarily halt residential evictions and ask the Secretary of the Treasury and the Secretary of Housing and Urban Development to identify federal funds to provide temporary financial assistance to help those struggling to meet their monthly rental or mortgage obligations; and (iii) allocate previously appropriated funds and ask for state contributions (in many cases from previously appropriated funds) to provide up to an additional $400 per week ($300 from the federal government and $100 from state governments) of unemployment compensation.

Deferring Payroll Tax Obligations

The presidential action regarding payroll tax obligation deferrals directs the Secretary of the Treasury to use his authority under Internal Revenue Code Section 7508A to defer withholding, deposit and payment of certain employee payroll taxes on wages or compensation paid during the period beginning Sept. 1, 2020, and ending Dec. 31, 2020 (the Payroll Tax Deferral Order).

The Payroll Tax Deferral Order applies only to Social Security payroll taxes that otherwise are required to be withheld and remitted from wages paid to employees who normally earn less than $4,000 every two weeks (about $104,000 per year), and only to the Old-Age, Survivor’s and Disability Insurance (OASDI) component, not to the Medical Insurance (MI) component. The OASDI component imposes a 6.2% tax on an employee’s gross wages, subject to an annual limitation that will not be affected by the order. The Payroll Tax Deferral Order notably also does not apply to or provide any sort of relief from either (i) the Self-Employed Contributions Act (SECA) tax that self-employed individuals are required to pay (typically with their quarterly estimated taxes) or (ii) the employer’s side of the Social Security payroll taxes. However, note the CARES Act separately permits both employers and self-employed individuals to defer the employer portion of OASDI otherwise payable through Dec. 31, 2020.

While the Payroll Tax Deferral Order also instructs the Secretary of the Treasury to “explore avenues, including legislation, to ultimately forgive the obligations to pay taxes deferred by the Payroll Tax Deferral Order,” absent further guidance or legislation, all amounts deferred become due after Dec. 31, 2020. The President has stated that the applicable trust funds will be held harmless from this deferral and any forgiveness through payments from the general fund. Most believe, given the emergency orders in place, that the President has the authority to temporarily defer the collection of payroll taxes. Most also believe congressional action would be required to turn those deferrals into permanent relief.

Action Required by Employers

The Payroll Tax Deferral Order does not apply to wages or compensation paid before Sept. 1, 2020, which gives the United States Treasury Department (Treasury) time to issue guidance and also gives employers some breathing room. Because of temporary relief from the “employee side” of the OASDI tax, affected employees will expect to see larger paychecks, starting in September. And because federal and state wage payment laws permit employers to withhold payroll and other taxes without employees’ written consent only if those taxes are then due and owing, employers will need additional guidance from Treasury and may not be permitted to treat the Payroll Tax Deferral Order as voluntary. If the deferred taxes are not ultimately forgiven through legislation or otherwise, employees will be subject to fairly large withholdings at a later date to make up for the deferral. There are approximately 18 weeks from Sept. 1 through Dec. 31. If an employee earns $1,000 per week during that period ($52,000 per year), approximately $1,116 in OASDI tax would be deferred and not withheld from that employee’s paychecks during that period. Finding a way to immediately recoup $1,116 in OASDI tax from such an employee through withholding after Dec. 31, 2020, could prove to be problematic for the employer and could be expected to cause financial hardship for some employees. And that scenario assumes that the employee will remain employed during any period of expected recoupment.

Thus, employers will need to take steps to collect the deferred payroll tax obligations from employees who cease to be on the payroll long enough to recoup the deferred amounts if those deferred amounts are not later forgiven by the government.

Given the unusual nature of this relief and the potential risks to employers and employees associated with its expected implementation, the administration and Congress should be motivated to resolve their differences through legislation before Sept. 1. If they are not able to agree on legislation, Treasury guidance regarding workable and reasonable methods of compliance and potential recoupment will be critically important to employers. For example, comments made August 12, 2020, by Treasury Secretary Mnuchin suggest that the Payroll Tax Deferral Order is expected to be “optional for employers”; only after Treasury guidance is formally provided, though, will employers know how that is supposed to work.

Authorship Credit: Jeffrey H. Paravano, John J. McGowan Jr. and Michelle M. Hervey

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