Payroll Tax Deferral Memorandum – What Do We Do Now?

Aug 27, 2020Business, Business Tax, Covid-19

Covid-19 relief for individuals and organizations

On August 8, 2020, President Trump issued an executive order and three memoranda providing or extending COVID-19 relief to individuals and organizations.

The executive order directs various Cabinet and executive agency heads to find means of limiting evictions and foreclosures. The three memoranda provide for the deferral of:

  • Collection of payroll taxes
  • Supplemental unemployment payments
  • An extension of student loan payment deferments
  • Reduction of interest rates for student loans

At this time, many questions exist surrounding these directives, and additional guidance is needed before implementation.

Payroll Tax Deferral

The payroll tax memorandum directs the Secretary of the Treasury to defer withholding, deposit, and payment of the employee portion of social security tax on wages or compensation paid from September 1 through December 31, 2020. The deferral includes only the 6.2 percent social security portion of taxes under the Federal Insurance Contribution Act for employees with bi-weekly pre-tax income less than about $4,000.

Amounts deferred will be without penalties, interest, increased amounts, or additions to tax. The payroll tax memorandum directs the Secretary of the Treasury to issue guidance to implement the memo and find ways to eliminate the deferred tax.

Note: The payroll tax memorandum provides only for the deferral of the employee portion of the social security tax. If the Secretary of Treasury does not eliminate the deferred tax, an affected employee will be required to pay any remaining deferred tax. Until further guidance is issued, it is uncertain how an employee will pay the deferred tax following the end of the deferral period.

The memorandum raises several questions for employers, including:

  • Is it voluntary?
  • How do you determine which employees are eligible?
  • When will the tax be due?
  • How do you collect the deferred tax from employees?
  • When will the tax be due in the future?
  • Will the software providers be ready?
  • When will additional guidance be available?

We expect the Department of Treasury and IRS to issue additional guidance soon. We recommend employers continue to withhold and remit the employee portion of social security tax as usual. 

Unemployment Insurance Benefits/Disaster Relief

In March, the CARES Act created the Federal Pandemic Unemployment Compensation Program, which provided an additional $600 per week to individuals collecting regular unemployment compensation benefits. This benefit expired on July 31, 2020.

The disaster relief memorandum directs the Federal Emergency Management Agency to provide benefits from the Department of Homeland Security’s Disaster Relief Fund. It advises states to use their Coronavirus Relief Fund allocation to provide financial relief to unemployed Americans affected by COVID-19, principally through an up to $400 per week supplemental unemployment compensation benefit. Seventy-five percent of the cost of the benefit shall come from those federal funds. State governments will be responsible for the remaining 25 percent, subject to an agreement between the federal government and the state concerning the program and funding.

The disaster relief memorandum makes two significant changes in eligibility compared to the $600 supplemental benefit under the CARES Act.

  1. It limits eligibility to individuals who receive at least $100 per week in unemployment compensation assistance.
  2. It requires the individual to certify that their lost wages are attributable to disruptions caused by COVID-19.

Student Loan Payment Relief

The student loan memorandum advises the Secretary of Education to continue student loan payment relief during the COVID-19 pandemic for specific federal student loans held by the Department of Education. It also directs the Secretary of Education to continue the temporary waiver of all interest on student loans until December 31, 2020. This memorandum further provides that student loan borrowers may continue to make payments if they wish to do so.

Eviction Minimization

The housing executive order directs Cabinet members to consider steps to take action necessary to minimize residential evictions and foreclosures during the ongoing COVID-19 national emergency. The order advises cabinet secretaries to consider how to halt evictions and foreclosures temporarily and look at ways to provide temporary financial assistance to renters and homeowners struggling to make monthly payments, including providing Federal funds to landlords.

Based on the need for significant additional guidance at this time, we cannot recommend implementing the payroll tax deferral. We are monitoring developments closely. As more guidance is provided, Smith Schafer will keep you informed.


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