While negotiations over a Phase 4 bill stalled in Congress, President Trump moved to ameliorate some of the problems caused by the cessation of several relief programs.
On August 8, the president signed four executive orders that offer $400 in weekly federal assistance to unemployed workers--down from the $600 they were getting before the benefit phased out at the end of July--a continuation of student loan relief, and a moratorium on evictions. Another ordered a payroll tax holiday for Americans making less than $100,000.
While none of those measures contains direct support for small businesses, they create a minefield of tax issues.
In particular, the order that defers the employee portion of payroll taxes for the rest of the year. That's 6.2 percent for Social Security and 1.45 percent for Medicare for workers earning less than $100,000 a year. If workers forego the payroll tax, their incomes will increase--money they could spend, theoretically. But here's where the confusion starts. If their incomes increase, their tax liability could change, too--and that might affect how much employers should withhold from checks. What's more, the payroll tax holiday is temporary; workers will still be liable for the tax, just at a later date.
While the president has vowed to forgive the liability and eliminate the tax obligation entirely if he is reelected, that presumes he can get Congress to approve--which is putting a lot of faith in the GOP's ability to win big in November. And it assumes that voters don't want to fund Social Security and Medicare.
It's not clear that the president's executive orders are legal. "I don't see how he can make them permanent without legislation, and even the temporary suspension of collection of the tax is of dubious legality," says Robert Litan, an economist and nonresident senior fellow at the Brookings Institution, a nonpartisan think tank in Washington. Litan suggests that the orders will face legal challenges, possibly from future Social Security recipients or Congress itself. "Congress has the power to tax, not the president, whose constitutional duty and power only extends to collecting taxes," he adds.
For businesses, the prudent thing is to hold tight and not change withholdings for either the payroll tax or income taxes, says Joe Manganelli, founder of the New York City-based strategic advisory and financial management firm Calculate. His advice? Employers should hang on to the employee portion of payroll taxes that would normally be paid to the government. "This obviously goes completely against the president's intention of putting more money in people's pockets," but, he adds, "it's a safer move when the result is unclear."
Here's why: The executive order defers the employee portion of payroll taxes. However, that cash comes directly from the employer's bank account through payroll distribution. So if businesses stopped collecting these funds with the expectation that they would be forgiven and they are not, they themselves might later be liable for the tax down the road. "Will it be the employer's job to set aside that cash to pay later or the employees?" he asks. That's an open question. "I could see a lot of unhappy employees, who don't realize they needed to be saving almost 8 percent of salary for four months," he adds.
He says that if the president eliminated the employer portion of the payroll taxes, businesses would get a hiring incentive. "If this holiday was applied to the employer, one in every 13 employees would essentially be paid for," says Manganelli. "That likely could encourage companies to reinvest that back into hiring."
There's also the question of where the president would get the money to fund an extension of federal unemployment insurance benefits. Trump has called for diverting other money, including federal disaster aid, to create a $400-a-week bonus payment. He is also asking states to chip in 25 percent of the outlay for the enhanced benefit. Does this mean he'll turn off the spigot on the federal disaster loan program that also benefits small business owners, known as Economic Injury Disaster Loans (EIDLs)? Would it involve redirecting leftover funds from the now defunct Paycheck Protection Program, which offered aid to beleaguered small businesses? And where are the already-struggling states going to get the funds to fulfill their end of the contributions?
These questions should put further pressure on Congress to act, suggests Litan. "My guess is that a lot will depend on the stock market's reaction to the breakdown of talks on Monday or later this week."