Employees haven’t been jumping up and down for a reduction in payroll taxes at least in part because so many people are still unemployed. Those who are working are well aware that Social Security will be unfunded and due quickly within that tax inflow. Now the IRS has made clear that the optional deferral of payroll taxes has huge downsides for employers.
IRS Puts Burden on Companies That Use Trump’s Payroll Tax Option
- Companies unlikely to defer taxes they have to pay back
- Taxes would be collected next year unless Congress acts
President Donald Trump’s move to defer payroll taxes through year-end likely will face resistance from companies after IRS guidelines left employers on the hook to pay back the levy early next year.
Trump directed the Treasury to allow the taxes to be deferred as a boost to a U.S. economy stalled by the coronavirus pandemic, saying it would give wage-earners more money to spend immediately. But it would hit workers with a bigger tax bill next year.
The Internal Revenue Service said employers that signed on to the option have to pay the money back by April 2021, most likely by doubling withholding for payroll taxes.
Employers “may make arrangements to otherwise collect the total applicable taxes from the employee,” if necessary, the IRS said.
If companies continue withholding the 6.2% payroll, it would blunt any potential economic or political benefit Trump had hoped to reap before the November presidential election. Congress could vote to forgive the liabilities — the only way the tax could be waived — but that’s unlikely amid the campaign.
The U.S. Chamber of Commerce has said previously that many companies won’t implement the deferral, because of difficulties administering it and the greater burden for employees next year.
“The chamber remains concerned that it leaves some critical questions unanswered,” Caroline Harris, the group’s chief tax policy counsel, said in a statement. “As a result, uncertainties persist that make implementation a continuing challenge.”
The IRS guidance also doesn’t address another issue: What employers should do if employees quit before end of the year, said Adam Markowitz, an enrolled agent and vice president at Howard L. Markowitz PA CPA.
The guidance “gives me zero reason to tell my employers that they are protected for this,” he said.More from ElectionTrump’s Convention Gave a Peek at 2024 Republican LineupDemocrats Pan Intel Chief’s Move to End Election BriefingsTrump Says Athlete Protests Are ‘Going to Destroy Basketball’Trump Raises $76 Million During Convention, Topping Democrats
Companies could potentially recoup the remaining taxes owed by withholding them all from employees’ final paycheck, said Adam B. Cohen, a partner at the law firm Eversheds Sutherland, but the guidance doesn’t explicitly say if that’s permitted.
The guidance also contains problems for employees if their employers choose to participate: They’ll have smaller paychecks next year when they have payroll taxes taken out of their paychecks twice.
Employees would see lower-than usual income from January to April, said Kyle Pomerleau, a resident fellow at the American Enterprise Institute, adding: “Individuals may not be ready or expecting a drop.”
The complications showcase the limits to unilateral action by the executive branch. Processing challenges have hobbled a separate move by Trump to extend, for a time, half of the $600-a-week supplemental insurance benefits that expired in July.
Treasury Secretary Steven Mnuchin has said he “can’t force” companies to stop withholding the payroll levies, but that he hopes many companies will participate.
There’s little time to decide whether to go ahead and reprogram payroll systems to accommodate the changes, with Sept. 1 looming fast.
To get the deferral, workers must earn less than $4,000 every two weeks, which amounts to about $104,000 per year. An individual earning $50,000 would owe about $1,073 in deferred taxes next year. Someone earning $104,000 — the maximum income to which the deferral applies — would owe $2,232.
The guidance has been the subject of disagreement between the Treasury Department and the White House, leading to delays in releasing it.
Because of the holdup, few — if any — companies will be able to stop withholding from paychecks starting on Sept. 1. Trump and his advisers have promoted the payroll tax deferral as a boost for workers with the economy still reeling from the coronavirus pandemic a little more than two months before the national election.
Payroll taxes finance Social Security, a program with widespread support that’s been around since 1935, were once called the “third rail” of American politics — an allusion to the danger of electrocution.
Deferred taxes would ultimately be paid into the Social Security trust fund, however estimates presume some of that money is lost to tax dodging and non-compliance. If Congress were to vote to forgive the taxes, that would exacerbate an already challenging outlook for the retirement program.
The demographic challenge posed by the large, rapidly retiring baby-boomer generation means there’s not enough money for the government’s obligations by 2035. Further starving the programs through a payroll-tax deferral makes Trump’s move a risky gambit.