Questions Remain as Payroll Tax Holiday Goes Into Effect

Pay now or pay later?

Since President Donald Trump’s Aug. 8 memorandum to the Treasury Department to defer collection of the employee portion of Social Security starting Sept. 1, that’s been the question facing employers and employees.

The memorandum was Trump’s response to Congress’ inability to come to terms on a new coronavirus relief package, the potential fourth such initiative since the COVID-19 pandemic hit the U.S. back in March.

The payroll tax “holiday,” or suspension period, runs through Dec. 31, and applies only to employees whose wages are less than $4,000 for a biweekly pay period, including salaried workers earning less than $104,000 a year.

The problem is this: Though the government giveth, the government also taketh away. Companies that suspend collection of emplotyees’ payroll tax under Trump’s memorandum would then collect additional amounts from workers’ paychecks from Jan. 1 through April 30, 2021, to repay the tax obligation.

That is, unless Congress decides to waive the obligation. Experts say there’ve been rumblings about it, but no action has been taken.

Employers who suspend collection of eligible employees’ Social Security payroll taxes during the four-month “holiday” must repay the deferred taxes to the IRS during the first four months of 2021.

Steve Boggs, who has a bachelor’s degree in accounting and serves as the managing shareholder at Grant, Millman & Johnson, a CPA firm in Novi, Mich., said those decisions could be affected by moves projected, though not yet made, in Congress.

“There is speculation that Congress will vote to permanently waive the repayment of the tax,” Boggs said. “But until something is passed, that is just speculation.”

Details of the plan have been sketchy, prompting a variety of questions from business owners. On Friday, the IRS attempted to answer some of those questions, issuing guidance the Society for Human Resources Management said raised as many questions as it answered.

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It’s also possible one of the decisions for some companies may involve not complying with the memorandum in the first place; the memorandum directs the holiday but provides no penalty for noncompliance.

Pete Isberg, vice president of government relations for ADP, Inc., an HR and payroll services company providing services to clients in more than 140 countries, told SHRM it’s “too early to say” whether companies will even follow the directive.

“Employers are … considering how the program would work,” he told SHRM.

Some of that decision-making, according to Boggs, will be up to the employee. Under the directive, Boggs said, the employee is “required to make an affirmative election” to have the taxes deferred.

“If the employee doesn’t make the election, nothing will change for them,” Boggs said. If they do, he added, “taxpayers will have additional spendable income in the short term and less spendable income for the first four months of 2021.”

Some experts are urging businesses not to defer, but Timothy Flacke, co-founder and executive director of Commonwealth, a non-profit focused on financial security for low-income Americans, told SHRM some companies whose employees “have struggled to make ends meet … may think it worthwhile to give their workers a bit more in their paychecks now, to be repaid next year.”

“Workers must understand that right now this is only a tax deferral, not tax forgivness, so it’s temporary relief,” Flacke told SHRM. But, he added, “it still represents an opportunity for workers to start building or adding to an emergency savings account, without seeing any change in take-home pay, by diverting the tax deferred amount into savings.”

According to CNN, a collection of business leaders has pushed back against the plan

“Many of our members consider it unfair to employees to make a decision that would force a big tax bill on them next year,” the U.S. Chamber of Commerce and more than 30 trade associations wrote in an Aug. 18 letter to Congress and the Treasury Department, the network reported.

“It would also be unworkable to implement a system where employees make this decision,” wrote the groups, adding many of their members will likely decline to defer the tax.