On Saturday, August 8th, President Donald Trump signed four executive actions relating to COVID-19 relief. The orders provide for a payroll tax deferment, an extension of the deferment of student loan payments and interest accrual, as well as a potential $400 per week in Federal Pandemic Unemployment Compensation. The last order instructs the Director of the CDC and Secretary of Health and Human Services to consider measures to temporarily halt residential evictions.
Payroll Tax Deferral
The most significant tax-related executive action is the “Memorandum on Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster.” Taxpayer be wary, this order does not revoke your obligation to pay payroll taxes; it merely postpones the taxes to be due at a later date. The tax deferral period is from September 1, 2020, through December 31, 2020. In essence, this means that during these four months, you do not have to pay the 6.2% employee share of Social Security (FICA) taxes.
The Medicare tax portion of payroll taxes (1.45% of wages plus an additional 0.9% for wages over $200,000) are not included in the deferral and therefore will need to be withheld and deposited as usual during this deferral period. Furthermore, the 6.2% FICA taxes still accrue during this period and become due after December 31st, 2020. It is important to understand that this is only a deferral, so as to not be hit with a large tax bill for unpaid payroll taxes at the end of the deferral period.
The payroll tax deferral is available to an employee whose compensation payable during any bi-weekly pay period is generally less than $4,000 on a pre-tax basis (or the equivalent amount with respect to other pay periods). This equates to approximately $104,000 in annual compensation for 2020. It is unclear how the payroll limit will be enforced and how fluctuations in employee’s earnings above and below the threshold are to be taken into account by the employer.
It is presumed the deferred payroll taxes will become due in January 2021. It is unclear how employers are to report the deferred taxes; the Treasury Secretary has until September 1, 2020, to provide additional guidance on compliance. However, this may not give employers adequate time to implement the deferral in their payroll systems.
Another question to consider – where will the funds to cover the tax obligation come from if employers truly deferred withholding on employees’ wages? The memorandum directs the Treasury Secretary to explore avenues to eliminate the obligation to pay the deferred taxes. Elimination of the obligation is far from certain, so employers will need to be prepared for the end of the deferral period. It is also not clear if the deferral is optional or required. Can employers continue to withhold FICA, as usual, to ensure the funds are available at the end of the deferral period? Do employees need to opt into the deferral? As of this writing, significant unanswered questions surround the payroll tax deferral.
The second executive action to be discussed, entitled “Memorandum on Authorizing the Other Needs Assistance Program for Major Disaster Declarations Related to Coronavirus Disease 2019,” relates to additional unemployment compensation.
Per the CARES Act, a “Federal Pandemic Unemployment Compensation” (FPUC) program was created to assist state governments by providing unemployed individuals an additional $600 per week, in addition to any state unemployment payments. However, this additional $600 benefit expired at the end of July. The August executive action authorizes governors to give a decreased payment of $400 per week for FPUC to eligible claimants, retroactively starting August 1st. For the purpose of the order, “eligible claimants” means claimants who are already receiving at least $100 per week for any of a variety of benefits, including but not limited to, unemployment compensation and extended benefits. A potential pitfall of this order is that it actually only authorizes a $300 federal contribution (down from the $600 per week in the CARES Act), and leaves $100 per week of the additional payments up to state government discretion. The most obvious issue is that states are suffering from severe deficits due to COVID-19 and the overwhelming wave of unemployment compensation claims, making it possible that those needing unemployment compensation may only see an additional $300 per week of benefits. Additionally, the $300 per week from the federal government is funded by unspent FEMA funds, creating concern about funding for future disaster relief needs. It’s hard to predict what’s in store for the rest of 2020 – we’re CPAs, not scientists.
Per the CARES Act, student loan interest rates were temporarily reduced to 0% and payments were suspended. This provision was scheduled to expire on September 30, 2020, and has now been extended through December 31, 2020, via executive action – the “Memorandum on Continued Student Loan Payment Relief During the COVID-19 Pandemic.” Of course, the memorandum still allows for payment of student loan obligations if the borrower so chooses, but gives relief in the form of an extended deferral. It’s important to note that this only applies to federal student loans, so if an individual is a recipient of a privately held loan (such as a bank loan), the deferral of payment and reduction in interest rate continues to not be applicable.
Assistance to Renters and Homeowners
Finally, the only true executive order of the group, titled “Executive Order on Fighting the Spread of COVID-19 by Providing Assistance to Renters and Homeowners,” which was purported to provide assistance to renters and homeowners, may not end up being assistance at all. The order explicitly states that it is up to the Secretary of Health and Human Services (Alex Azar) and the Director of the CDC (Robert R. Redfield) to consider whether any measures to temporarily halt residential evictions are “reasonably necessary” to prevent the spread of COVID-19. This order appears to focus more on the spread of COVID-19 rather than directly on any assistance to individuals who are, or who may become delinquent on rental or mortgage payments. In addition, it doesn’t specify whether or not assistance will actually be provided to renters and homeowners. The order states that it is the Secretary of Treasury (Steven Mnuchin) and Secretary of Housing and Urban Development (Ben Carson) who will identify any available federal funding for rent and mortgage assistance. Therefore, as it stands, the executive order is mostly a declaration to consider measures, as well as an encouragement of lessors and creditors to forgo rental income and mortgage payments respectively. In comparison, the CARES Act banned late fees and eviction filings on properties backed by federal mortgage programs until July 25th.
No doubt, it is important to understand the minutia of these executive actions, and additional guidance will be necessary to implement them. These could very well be misinterpreted by businesses and individuals through no fault of their own.
That being said, these executive actions may face significant legal challenges. It has been debated whether or not the president has the authority to halt the collection of payroll taxes. The U.S. Constitution grants Congress the power to impose taxes and spend public money for the national government. But on the contrary, it is Section 7508A of the Internal Revenue Code, which gives the Secretary of the Treasury the ability to postpone certain tax liabilities up to one year (if a federally declared disaster or terroristic or military action occurs), that may provide support for the memorandum’s validity. Notably, this is the same section of the tax code that was cited when the 2019 tax-year filing deadline was extended.
Whether or not these four executive actions face future legal action, they have been signed and are already in effect in the case of the additional unemployment compensation and continuation of student loan payment deferral. The payroll tax deferral period begins September 1st, and it cannot be overstated that this is only a deferral, and any payroll taxes left unpaid will become due after the end of the year. It is still to be determined how the executive order regarding a potential eviction moratorium will play out.
If you have any questions regarding these executive actions and their potential tax consequences, please contact your local Blue & Co. advisor.