On Saturday, President Trump issued four executive orders, one of which directs the Treasury Department to use their authority to provide a grace period with respect to the withholding, deposit, and payment of the employee portion of Social Security taxes on wages paid for the period beginning September 1, 2020 and ending on December 31, 2020. The executive order is separate from, but could be viewed as a companion to the deferral of the employer portion of Social Security taxes that is provided by the CARES Act.[1] Because the executive order does not self-execute a grace period, we expect guidance in the near term. In the meantime, we felt it would be helpful to provide some of our insights, as well as some of our questions, regarding the executive order and how Treasury will implement it. 

The Executive Order is Requesting a Grace Period for Payment

The executive order directs the Treasury Department to provide a grace period for the employee portion of Social Security taxes. As a result, the upcoming guidance will amount to an interest-free loan, which raises a host of questions, including:

• When will the interest-free loan be due?
• Will the amount be due in a single installment or over multiple installments? Based on the criteria within the executive order, it is possible that the amount of the interest-free loan could exceed $2,000.
• Whose obligation is it to pay off the interest-free loan: the employer or the employee? Traditionally, it is the employer's obligation to withhold, deposit, and pay employee's payroll taxes.
  • If it is the employer’s obligation, presumably the employer will withhold the amount due from the employee’s paycheck. However, what happens if the employee whose taxes is subsequently due no longer works for the employer? Alternatively, what if the amount due exceeds the full amount of the employee’s paycheck?
  • If it is the employee’s obligation, will they need to make a direct payment?

Additionally, it is worth noting that the grace period does not change the due date for the payment of taxes. Therefore, if the amount due is not timely paid by the end of the grace period, then the IRS may assess interest and penalties based on the due date of the payments.

The Threshold to Qualify for the Grace Period Is Unclear

The executive order suggests that the grace period only applies to an employee whose wages or compensation payable during any bi-weekly pay period generally is less than $4,000. Therefore, the Treasury Department will need to provide guidance as to what does “generally” mean. Is it intended to exclude bonuses or other compensation? Also, how does an employer determine an employee’s qualification as they may work for more than one employer? For example, if X works for Employer Y and earns $3,000 a bi-weekly pay period and also works for Employer Z and earning $1,500 a bi-weekly pay period, does X qualify and if not, how will Y and Z know?

With that said, one thing that is clear is that the executive order only applies to employees and not to self-employed individuals. This may be an area in which the Treasury Department looks to expand the requested relief to bring it in line with the CARES Act’s deferral for the employer portion of Social Security taxes.

A&M Taxand Says

The executive orders come as ongoing negotiations between the Republicans and the Democrats on the next COVID-19 relief package have reached a standstill. The executive order on the employee portion of Social Security taxes acknowledges that legislative action is required to convert the grace period into forgiveness of the tax. However, previously, members of both parties have expressed a lack of interest in providing forgiveness for any employment taxes.

Until the Treasury Department issues guidance and a full picture of the grace period emerges, employers are left wondering how they can potentially implement the grace period which may begin on wages paid for periods beginning in less than three weeks. Additionally, if the Treasury Department provides the requested grace period, it presumably would not mandate that employers cannot withhold or pay the employee portion of the Social Security taxes in a timely manner. As a result, employers may want to consider whether they even want to provide the grace period. In light of the potentially short turnaround for employers to implement the grace period once guidance is provided, it is important that clients work with their trusted advisors and payroll processors to help determine the application of the rules, and whether they want to apply them. A&M will continue to monitor the evolving approach to COVID-19 relief on Capitol Hill and within the Administration, and will provide timely updates on new developments, which will be found here. 

[1] Pursuant to the CARES Act and the IRS FAQs, the employer portion of Social Security taxes (including for self-employed individuals) that would otherwise be due on or after March 27, 2020 and before January 1, 2021 is 50% deferred until December 31, 2021 and 50% deferred until December 31, 2022. The deferral also applies for taxes that are due on wages that are paid on or after March 27, and before January 1, 2021, even if the taxes are not due until after December 31, 2020.