President Donald Trump’s Payroll Tax Holiday, which allows companies to defer withholding Social Security taxes, has been promoted as a way of putting more money into the pockets of American workers.
But rather than a gift from the government, it functions as a short-term personal loan against taxes, a liability that the workers must pay the next year.
Participating in the voluntary program, or “opting in,” as it is called, and not withholding taxes from employees’ checks poses grave financial risks for employers, particularly mom-and-pop shops, building contractors and other small businesses that will be on the hook if workers are no longer around when the deferred payments come due.
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Businesses that opt-in are responsible for collecting the taxes not withheld this year by April 30, 2021, and then forwarding those funds on to the government, or interest, penalties and other taxes will begin to be added to the employers’ original bill.
For businesses that hire seasonal employees to meet end-of-the-year holiday demand, like much of the retail industry, not withholding payroll taxes for workers who will no longer be employees in January, paying those uncollected taxes becomes the employers’ problem, said Caroline Harris, VP of Tax Policy at the U.S. Chamber of Commerce.
“The liability attaches to the employer,” Harris said. “If you’re a small or midsize business and you’re struggling, and then suddenly you’re faced with a tax bill that isn’t really your tax bill, that can be really detrimental.”
A worker making $35,000 a year receives $83.46 more in their biweekly paycheck during the deferral period, with an unpaid tax liability of $751.15 over the holiday’s nine biweekly pay periods due in 2021, according to an August letter from the U.S. Chamber of Commerce and a coalition of other business groups.
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They sent the letter to Treasury Secretary Steven Mnuchin, Senate Majority Leader Mitch McConnell, and House Speaker Nancy Pelosi. A person who makes $50,000 a year would have an estimated $1,073 withholding deferred over the holiday’s nine biweekly pay periods, the letter said.
For participating companies, the joy of employees over a bigger paycheck adds risk that goes beyond finances, said Robert Delgado, principal-in-charge of the Compensation and Benefits group of KPMG LLP’s Washington National Tax practice.
“You can have good employee relations by reducing the payroll taxes that they’re paying this year, but then negative employee relations come next year when you have to double withhold in order to pay back those payroll taxes early next year,” Delgado told Newsweek, “in particular at a period of time following the holidays when income tends to be a little bit tighter.”
Business owners and organizations are looking at the optional “holiday” and saying, “No way.”
Harris told Newsweek that very few of the Chamber’s member businesses, as well as other large corporations and small businesses eligible for the tax holiday, have signed up for the president’s plan.
“The idea of putting extra money into people’s pockets, so they can provide for their families or pay for child care, things like that, is well-intended,” Harris said. “But unfortunately, because the president can only change the timing of these taxes, the deferral, and can’t forgive them, it winds up at the end of the day creating more complications.”
Payroll taxes are being deferred for some federal employees and active military personnel, but many of the more than 5 million eligible employers, including many state and local governments as well as many universities and colleges, have opted not to participate in the tax holiday program.
“Overall, it seems employers have judged that it’s a program not worth taking advantage of,” said Garrett Watson, senior analyst at the nonprofit Tax Foundation. “And because the deferral is shifting the timing of when you pay the tax, not an actual savings for the employer or the employee, a lot of firms are deciding that it’s not worth the trouble.”
Workers and employers are each responsible for 6.2% in Social Security taxes — 5.015% for Old Age and Survivors Insurance (OASI) and 1.185% for Disability Insurance (DI), when businesses withhold those taxes from workers’ paychecks in normal times. Social Security taxes, in general, are levied on the first $137,700 in wages. Medicare withholding taxes are not deferred under the president’s order or Treasury’s guidance.
The Treasury Department’s guidance on the plan ordered in Trump’s August 8 memorandum allows companies to defer until the end of this year withholding payroll taxes from the paychecks of employees who gross less than $4,000 in a biweekly pay period.
Treasury Secretary Steven Mnuchin clarified the president’s earlier statements, saying Trump may seek forgiveness of taxes not paid during the deferral period from September through December this year or implement a further holiday, but not an outright repeal of the taxes that fund Social Security. Observers say Treasury has the authority to defer tax payments up to one year, but only Congress can eliminate the taxes permanently.
Watson told Newsweek the tax holiday deferral changes the timing of payments to the Social Security Trust Fund and should mean minimal revenue loss, but he cited a preliminary estimate by the nonpartisan Committee for a Responsible Federal Budget that put the potential cost at about $5 billion from deferred taxes that may be unpaid.
Forgiveness of those taxes not yet paid would raise concerns for funding of Social Security, Delgado said.
“There have been promises that (the tax holiday) will not impact benefits,” Delgado said, “but the SSA (Social Security Administration) Actuary recently noted that eliminating payroll taxes without an alternative revenue source would permanently deplete the DI Trust Fund by mid-2021 and the OASI Trust Fund by mid-2023.”
In an August 24 letter to Congress, Social Security Administration Chief Actuary Stephen Goss said that if those payroll taxes ended as of January 1, 2021, the Disability Trust Fund would be “permanently depleted” by the middle of next year and the Social Security Trust Fund would be bankrupt by mid-2023 “with no ability to pay OASI benefits thereafter.”
Compared to the usual extended amount of time and discussion for tax changes, there was an extremely short lead time between the president’s announcement, the Treasury Department’s brief guidance and the start date of the holiday, leaving many unanswered questions.
As a result, confusion abounds about how to implement and administer the holiday and effectively keep proper accounting records to avoid running afoul of the government and incurring fines.
Many payroll systems and software that employers and third parties use to do their payroll are not easily adaptable to meet the complexities of the tax holiday. In addition, collective bargaining agreements may prevent companies from participating, and state laws further complicate matters for companies that may be prohibited from withholding taxes from employees checks for tax liabilities incurred in prior pay periods.
But many businesses have chosen to participate in a program under the Coronavirus Aid, Relief, and Economic Security (CARES) Act that allows them to postpone their portion of Social Security tax payments, with half of those taxes due by the end of next year and the remainder due at the end of 2022.
“That’s much easier to administer on the employer side because it’s easier for firms to centrally plan their cash flow and liquidity needs to ensure that they have the deferred tax saved up to pay back over the next two years,” Watson said.