New Payroll Tax Deferral

There has been a lot of activity in Congress lately as both the House and Senate search for an amenable agreement on providing additional relief as the COVID-19 pandemic continues. The catalyst was the expiration of extended federal unemployment benefits initiated by the CARES Act. At the same time, Congress also wanted to tackle funding for states, additional school funding, changes to the Paycheck Protection Program, economic stimulus payments, and new business tax incentives. The efforts resulted in two versions of relief bills, including the HEROES Act approved by the House and the HEALS Act introduced in the Senate. Despite weeks of negotiation, no agreement was reached on a compromised bill that would satisfy both parties. As a result, on August 8, 2020, President Trump signed one Executive Order and three memoranda dealing with student loans, evictions, unemployment benefits, and a new payroll tax deferral. While most of these deal with individual issues, the payroll tax change will impact businesses. To help clients, prospects, and others, Klatzkin has provided a summary of the orders below.

Student Loan Payments
In this memorandum, student loan payments will continue to be deferred and interest-free through the end of the year.

Residential Evictions
The Executive Order directs various federal departments to determine if an eviction moratorium would help prevent the spread of COVID-19.

Extended Unemployment Benefits

This memo authorized FEMA to utilize Stafford Act disaster relief funds up to $44B for lost wages due to the COVID-19 pandemic. Individual states are required to contribute 25%. The total unemployment is $400, of which states must pay $100.

Payroll Tax Deferral
Perhaps most relevant to New Jersey and Pennsylvania business owners is the payroll tax deferral memorandum. In it, the President directed Treasury to provide guidelines for the deferral of the withholding, deposit, and payment of the old age, survivor, and disability insurance tax (OASDI) imposed on employees. Typically, a W-2 employee is taxed at 6.2% of earnings for OASDI, or social security tax, and employers are required to match the payment. Since the CARES Act already deferred the employer-side taxes, the Order applies only to the employee side. Note the deferral period begins on September 1, 2020, and extends through December 31, 2020.

Important Details

• Income Exclusions – The Order mandates that only those who generally earn less than $4,000, calculated on a pre-tax basis, are eligible on a bi-weekly pay period. This means that only those individuals who make (pre-tax) $2,000 per week, $4,333.33 semi-monthly, or $8,666.67 per month are eligible to participate. If an employee’s pay exceeds the limit, the amount of OASDI must be withheld and paid by the employer.
• Penalties – The Order also prohibits the assessment of penalties, interest, or additional taxes on deferred payments by eligible individuals.
• Tax Forgiveness – There is mention of tax forgiveness, but no specific rules or requirements were issued. The Executive Order directs the Secretary of Treasury to explore all avenues, including legislation, to eliminate the obligation to pay deferred taxes at the end of the program.

There are still a lot of questions to be answered surrounding the executive action.  For example, it is unclear if the payroll deferral will be mandatory or elective for employees and employers. Clarification is needed whether or not an employer will be left liable for an employee’s share of the tax if the employee defers withholding then leaves their position. The Treasury Department will have to address what happens if an employee exceeds the $4,000 limit in one pay period and goes back below $4,000. As we learned from the payroll changes in the CARES Act, changes can take weeks to implement.

It is also unclear whether the above will be implemented or challenged legally. We will continue to monitor the legislation and will provide updates accordingly. Whatever the outcome, it does provide insight into the type of changes businesses can expect to come from Washington in the coming weeks.

Contact Us

If you have questions about the information outlined above or need assistance with an accounting or tax-related issue, Klatzkin can help. For additional information, click here to contact us. We look forward to speaking with you soon.