President Donald Trump's payroll tax holiday for American workers kicked in on September 1, but few if any are likely to see a dime of it. That's because tax and benefits experts are calling the current proposal unworkable.
"It's a nightmare for an employer," says Shauna Zobrist, a CPA and an adviser at Breakaway Bookkeeping & Advising, a virtual network of bookkeepers and accountants in Portland, Oregon. "There are so many unknowns that become apparent when you start peeling back the layers."
That's even after the U.S. Treasury and the Internal Revenue Service on August 28 issued joint guidance on the implementation of Trump's August 8 executive order--which temporarily deferred the employee portion of payroll taxes for workers with annual incomes of $100,000 or less, or $4,000 per biweekly pay period.
The guidance from the two agencies confirmed that employers would be on the hook for repaying the government for any payroll taxes that their employees defer. The businesses in turn are supposed to collect the taxes from their employees. That amounts to 6.2 percent of an employee's salary for Social Security and 1.45 percent for Medicare. The tax can be deferred from September 1 through December 31 of this year and recouped from January 1 through April 30, 2021.
The agencies' guidance left many questions unanswered, among them: What if an employee has more than one job? What if the employee changes jobs? What if the company goes out of business? How is an employer supposed to track whether an employee elects to defer the tax? Will employees be able to make elections?
The biggest open question is whether workers will have a say in their employer's participation. While Treasury Secretary Steven Mnuchin, speaking on Fox Business shortly after Trump issued the executive order, said that the payroll tax deferral would not be mandatory, that "optional" terminology isn't listed in the order or in the guidance.
This omission alone is a massive oversight, Zobrist says. "What if you say no, but your employee really wants it? Can you deny your employees from being allowed to defer their taxes?" asks Zobrist. "The employer is then stuck in a position of having to figure out how to facilitate it."
That in itself is no small task. If for a moment you can get past the fact that the IRS has not indicated how to document employee elections, you're left with the added paperwork burden that comes with treating some employees' pay differently.
Indeed, companies will have content with a different payroll tax rate that applies for part of the year--and in fact takes effect in the middle of the quarter--and applies to some employees but not all. "That's a complicated bit of programming to do," says Pete Isberg, vice president of government affairs for payment processor ADP. He adds that all of this would come on top of needing to provide appropriate explanations to employees about the opportunity and allowing them time to think about how to respond. "Considering that question applies to 100 million people, that's a lot of volume; it's a lot of things to ask of people and do record keeping on in the next few days."
None of this even accounts for the liability issues small businesses could encounter if, say, an employee were to quit her job after pausing withholdings. While Trump has vowed to forgive the liability and even terminate the tax if reelected, doing so requires an act of Congress. And that's not likely, as lawmakers on both sides of the aisle have little appetite for doing so. Payroll taxes contribute about $1.3 trillion annually (both FICA and Medicare payroll taxes), which is about 38 percent of total federal revenue, according to Garrett Watson, senior policy analyst at the Tax Foundation, a conservative-leaning think tank in Washington, D.C.
The IRS did note in its guidance that employers are free to collect the funds from employees directly next year. While that can be achieved by garnishing future paychecks, it's not clear how employers would collect future wages if an employee no longer works for them.
They could send a bill to former employees, but how you would actually compel them to pay is very much an open question, says Jonathan Barber, senior vice president of compensation and benefits policy research at Ayco, a Cohoes, New York-based financial counseling service owned by Goldman Sachs. "How far could the employer go?" Barber asks. "That would need to be clarified."
With so many unknowns, Barber is instructing clients to stand still and wait for more guidance. "It's a tough call," he says. "I just don't know how an employer is going to implement this based on what's out there and the potential of being left on the hook for this amount if they can't ultimately collect it. The safer bet is to wait until it's clear to do anything."
The U.S. Chamber of Commerce offered an even less optimistic appraisal: "Given the numerous implementation challenges, remaining outstanding questions, and the extremely short implementation period, employers are likely to continue withholding and remitting payroll taxes to the Treasury," Caroline Harris, the Chamber's vice president of tax policy tells Inc. in a statement. Plus, it does nothing for the 30 million Americans who lost their jobs as a result of the coronavirus pandemic. "To achieve relief that is workable for employers and provides relief to American workers, we urge Congress and the administration to come together and continue work on legislation."
Even so, for employers that see the deferral as a benefit to employees who may be struggling, the good news is that you don't have to implement it right away, notes ADP's Isberg. "We've talked to the IRS about this," Isberg says. "They understand that employers are going to need time to do it."
But don't wait too long, he says. The deferral itself only lasts through December 31, but also the taxes are not retroactive. "If you implement this in October," Isberg says, "you cannot make adjustments for payrolls processed in September." In other words, he adds, "You can't go back and refund employees for the amounts that were deducted for Social Security taxes. It has to be prospective."