COVID-19: Tax Loophole Allows Tax Free Covid-19

Payments to Employees

President Trump signed four executive orders Saturday to provide additional jobless aid, suspend the collection of payroll taxes, avoid evictions and assist with student- loan payments. The orders came after negotiations had failed for several weeks to bridge the gap between a Democratic $3.5 trillion aid bill, passed by the House in May, and a Senate Republican $1 trillion package unveiled last week. Official talks between the administration and Democratic leadership ended on August 7, with no agreement and no plans to convene talks again. Here is a breakdown of the Executive Orders:

Jobless Aid / Unemployment Insurance

Benefits

The administration plans to roll out a $400 weekly payment, funded 75% by the federal government and 25% by states. Under the executive action, the additional jobless benefits will be paid from the Disaster Relief Fund, the government’s primary source of money to pay for emergency costs. The extra weekly benefits would be available until December 6, 2020, or until the disaster fund’s balance drops to $25 billion, according to the executive action. To pay for the benefits, the action sets aside $44 billion from the disaster fund, which currently has a balance of approximately $70 billion. The administration said states could tap the $80 billion in remaining money from an earlier round of state and local aid to help make their 25% portion. The CARES Act provided a $600 per week federally funded unemployment compensation assistance to an eligible unemployed person, in addition to standard state unemployment benefits. That benefit expired July 31, 2020. The Disaster Relief Memorandum directs FEMA to provide benefits from the Department of Homeland Security’s Disaster Relief Fund and directs states to use their Coronavirus Relief Fund allocation to provide financial relief to unemployed Americans affected by COVID-19, principally through an up to a $400-per-week supplemental unemployment compensation benefit. The Disaster Relief Memorandum makes two significant changes in eligibility compared to the $600 supplemental benefit under CARES. First, the Memorandum requires that to be eligible, an individual must receive at least $100 per week in regular state unemployment compensation assistance (up from $1). Second, the Memorandum requires the individual to certify that his or her lost wages are attributable to disruptions caused by COVID-19. In addition, the funding for this new benefit is different than the funding under the CARES Act because the federal government will only pay for 75% of the costs associated with this benefit. State governments will be responsible for the remaining 25%, subject to an agreement between the federal government and the state with regards to the program and funding.

Eviction Minimization

The Housing Executive Order directs certain members of the Cabinet to consider, identify, review, and take action necessary to minimize, to the greatest extent possible, residential evictions and foreclosures during the ongoing COVID-19 national emergency. President Trump directs the Secretary of Health and Human Services and the Director of the Centers for Disease Control and Prevention to consider whether any temporary halting of evictions for failure to pay rent are reasonably necessary to prevent further spread of COVID-19. President Trump directs the Secretary of the Treasury and the Secretary of Housing and Urban Development (“the “HUD Secretary”) to identify Federal funds that could be used to provide temporary financial assistance to renters and homeowners who are struggling to make monthly payments as a result of financial hardships caused by COVID-19. President Trump also directs the HUD Secretary to take action to promote the ability of renters and homeowners to avoid eviction or foreclosure, including by providing Federal funds to landlords. Finally, President Trump directs the Director of Federal Housing Finance Agency to consult with the Secretary of Treasury to review existing authorities and resources that may be used to limit evictions.

Payroll Tax Deferral

The Tax Memorandum directs the Secretary of Treasury to defer the withholding, deposit, and payment of the employee portion of social security tax (but not Medicare tax) on wages or compensation paid during the period of September 1, 2020, through December 31, 2020, if the employee’s wages or compensation payable during any biweekly payroll period are generally less than $4,000, calculated on a pre-tax basis, or the equivalent amount during other payroll periods. Amounts deferred will be without penalties, interest, additional amounts, or additions to tax. The Tax Memorandum directs the Secretary of Treasury to issue guidance to implement the Memorandum and to also find ways to eliminate the deferred tax entirely. It should be noted that the Tax Memorandum provides only for the deferral of the employee portion of social security tax and, in the event the Secretary of Treasury does not eliminate the deferred tax entirely, an affected employee will ultimately be required to pay any remaining deferred tax. However, until further guidance is issued, it is unclear how an employee would pay the deferred tax following the end of the deferral period. Special Note: THIS IS ONLY A DEFERRAL, DEFERRED SOCIAL SECURITY TAX IS STILL PAYABLE AND EMPLOYERS AND OFFICERS ARE PERSONALY LIABLE TO PAY PAYROLL TAXES REGARDLESS IF WITHHELD OR NOT.

Student Loan Payment Relief

The Education Memorandum directs the Secretary of Education to effectuate waivers of and modifications to the requirements and conditions of economic hardship deferments and provide such deferments as necessary to continue the temporary cessation of payments and the waiver of all interest on student loans held by the Department of Education until December 31, 2020. The Education Memorandum further provides that student loan borrowers may continue to make payments if they wish to do so. The Cares Act gave borrowers with federal student loans a six-month suspension of their monthly payments, interest-free. The law applied to roughly 35 million borrowers whose loans are held by the federal government. However, the law excludes about eight million borrowers whose loans are held by private lenders with a government guarantee. This payment moratorium is set to expire September 30. Saturday’s executive order would extend the payment moratorium and zero-interest until the end of the Coronavirus crisis

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