Executive Order for Payroll Taxes

A few weeks ago, President Trump signed four executive orders to act as a bridge until more permanent measures for coronavirus aide are passed by Congress. The least understood of these gave employers the option to defer the employee-only portion of 6.2% for Social Security tax for employees that typically earn less than $104,000. This deferral is allowed from September 1st through December 31st of this year. It is important to note that employees do not get to make this decision and this decision is at the employer’s sole discretion.

Based on current IRS guidance this is simply a deferral of taxes owed, so additional withholding on compensation from January 1 through April 30th, 2021 would have to increase to recover the deferred taxes. If the employer does not collect the deferred taxes from an employee (i.e. terminated employee), the employer is still responsible for payment on the deferred taxes by May 1, 2021. For eligible employees, employees would have no Social Security tax withheld now until the end of the year but would have double the normal withholding for the first four months of 2021 to recover the delayed taxes. If the taxes were not withheld from an employee’s paycheck then the employer would be responsible to pay the shortfall for the remaining deferred taxes.

In our view implementing this deferred tax option for eligible employees does not seem to make sense. It may create a cash flow burden next year for employees and potentially an unfunded liability for employers. There has been some speculation that Congress may forgive these deferred liabilities, but given the current political uncertainty, we do not feel secure recommending this based on conjecture. If you have any questions or concerns, please do not hesitate to contact us.

President Trump’s Executive Order and How They May Impact You

Fiscal legislation stalled last week and with the current stimulus expiring President Trump this weekend signed new executive orders to provide temporary relief and hopefully help break the current gridlock in Washington. There are four key areas that we will take a closer look at:

1. Extend Unemployment Insurance – The $600 in additional weekly unemployment benefits under the CARES Act expired at the end of July. The executive order will provide $400 a week in extra benefits to anyone receiving at least $100/week in regular benefits with 75% being paid by federal funds and 25% being paid by the states. This order is designed to be a temporary stop-gap until more permanent solutions are passed. As a result, the extra $400 a week benefit may last another 4-6 weeks for individuals.

2.  Deferral of Student Loans – Under the CARES Act no payments and no additional interest was set for all Education Department loans and this was set to expire September 30th. The new executive order will extend these benefits until the end of the year (December 31st).

3. Minimize Evictions and Foreclosures – The CARES Act provided protection for evictions and foreclosures but the dates they expired were different. The new executive order aims to provide more protection to prevent evictions and foreclosures due to COVID. The order should make funds available to aid renters and homeowners that cannot meet their obligations.  The order also instructs the HUD and Treasury secretaries to make funds available to assist renters and homeowners unable to meet their obligations.

4. Payroll Tax Deferral – The executive order will stop automatic withholding of employee paid Social Security tax of 6.2% for employees who make less than $4,000 every two weeks (approximately $104,000 per year) until the end of the year (December 31st). This is the most complex and controversial part of the executive orders. The challenge is that technically only Congress can reduce or eliminate payroll taxes so for this to go into effect there must be a reasonable expectation for Congress to move forward with this. The payroll tax deferment is scheduled to take effect on September 1st.

The goal of these executive orders is akin to slapping tape on a leaky pipe. They will provide temporary relief but do not make the situation permanently better. If these policies are indeed implemented, this suggests that they might force Congress to act by the start of September to avoid further disruptions.