It has been nearly three weeks since President Donald Trump issued a presidential memorandum allowing the deferral of certain payroll tax obligations. Since then, few new details have emerged about how the so-called “tax holiday” will work.
As of press time, employers are still waiting for guidance from the Treasury Department on implementation, making it all but impossible for companies to start offering employees slightly bigger paychecks on Sept. 1, the deferral’s effective date.
Here’s what we do know: The deferral only applies to the 6.2% of each paycheck employees pay toward Social Security; employers still have to pay their portion of the Social Security tax. Only employees making less than $4,000 every two weeks, or about $104,000 each year, will be allowed to defer. The deferral applies to taxes on wages paid from Sept. 1 through Dec. 31.
One of the biggest unanswered questions is whether employers, who are statutorily on the hook for the employee’s portion of the Social Security tax, will get some sort of guarantee they won’t be stuck with the bill when, or if, it eventually comes due.
“You can forecast the many ways that an employer might be left holding the bag on this one,” said Kevin Selzer, a tax and benefits attorney with Holland & Hart.
“If they defer the taxes and the employee leaves, or if the employee is on a leave of absence and doesn’t have pay to withhold from later on, you can assume that employers are going to want some assurances that they’re not going to be on the hook for that missed tax,” Selzer said.
Bob Robenalt, a partner in the Columbus, Ohio office of Fisher Phillips, called this the “most troubling” of the many lingering questions. “There’s some thought that the Treasury Department may allow workers to pay it back through the income tax process,” he said. “It [could] become an add-on to their income tax obligations at the end when they file their taxes.”
Trump has said he plans to forgive the deferred payroll taxes if re-elected, and in his memorandum, he directs the Treasury to “explore avenues, including legislation,” to eliminate the obligation to pay the delayed taxes. But Trump would need Congress to make these changes. There has been a bipartisan lack of enthusiasm among lawmakers toward the idea of payroll tax cuts, which is probably why the president ended up issuing the memorandum in the first place.
The business community has also been unenthusiastic about the plan as it exists now. On Aug. 18, more than 30 trade groups, including the U.S. Chamber of Commerce, the National Retail Federation and the National Association of Manufacturers, sent a letter addressed to Speaker of the House Nancy Pelosi, Senate Majority Leader Mitch McConnell and Treasury Secretary Steven Mnuchin urging forgiveness of the tax liability and suggesting many companies will opt out of participating unless the tax deferral is forgiven.
“Many of our members consider it unfair to employees to make a decision that would force a big tax bill on them next year. It would also be unworkable to implement a system where employees make this decision,” said the letter from the business groups.
“Therefore, many of our members will likely decline to implement deferral, choosing instead to continue to withhold and remit to the government the payroll taxes required by law.”
Mnuchin has suggested the deferral won’t be mandatory, telling Fox News on Aug. 12 that “we’re going to create a level of certainty for employers that want to participate. We can’t force people to participate.” But until there is official guidance from Treasury, there is still some uncertainty about whether employers will be required to offer the deferral and whether individual employees will be able to opt in or out.
There could also be practical hurdles for payroll companies, particularly if each employee can choose whether to participate. “From a programming standpoint with payroll companies, that’s a lot harder than it sounds,” Selzer said. “The payroll companies are probably going to need some time after Treasury issues guidance in order to get their systems set up correctly.”
The National Payroll Reporting Consortium on Aug. 20 issued a statement saying it is “concerned” that there is not enough time to implement the deferral by Sept. 1 and that guidance on deferrals and any related reporting and other requirements are needed before programming changes can be made.
“The programming changes are substantial. Payroll systems are designed to apply a single Social Security tax rate for the full year, and to all employees equally,” said the trade association, whose members include ADP, Paychex and other major payroll service providers.
“Applying a different tax rate for part of the year, beginning in the middle of a quarter, and applying such a change to some employers but not others, and to some employees but not others, is quite complex. Not all employers and payroll systems will be able to make these complex changes by Sept. 1.”
If employers opt out of the deferrals entirely, they could run up against the expectations of employees who have heard they’ll be getting bigger paychecks. “They’re going to question their employer, ‘Why didn’t you defer my Social Security taxes in this paycheck?’” said Robenalt. “And that may create some issues there.”
It doesn’t appear self-employed people will be eligible for the deferral under Trump’s Aug. 8 memo, although the Coronavirus Aid, Relief and Economic Security Act separately allows them to defer half the Social Security tax they pay on net earnings. “I don’t believe that they are going to have any benefit [from the Trump memo],” Robenalt said. “So that payroll holiday is going to be something that is going to be limited to individuals who are getting their paychecks from their employer.”
With so many questions left unanswered days before the tax deferral is set to go into effect, what are employers supposed to do?
“This is sort of an easy issue at the moment,” Selzer said. “We’re going to wait and see what happens when the guidance comes out from Treasury. But until then, it’s a wait-and-see approach.”
Robenalt said his firm is giving similar advice. “We believe that the best course of action right now is just to hold off and wait and see what happens in how the administration chooses to guide on this topic.”