- President Donald Trump apparently doesn’t have to wait for Congress to act on a payroll tax holiday. He is pushing one out through executive order.
- Without certainty that the tax would be forgiven, employers could be reluctant to participate. Instead, they’ll set aside the employees’ share of payroll tax to pay the IRS later, rather than giving the money to employees.
- Though employers and employees are each responsible for half of the 12.4% Social Security tax and the 2.9% Medicare tax, employers are generally required to withhold and deposit taxes on their workers’ behalf.
Even as President Donald Trump pushes out a payroll tax holiday via executive order, there's no guarantee workers will pocket any money.
Congress has been hashing out the details of the next coronavirus relief package, and lawmakers on both sides of the aisle have been cool to the payroll tax cut idea.
Payroll taxes are shared by workers and employers. Each is responsible for half of the 12.4% tax that funds Social Security and the 2.9% Medicare tax.
Social Security taxes are subject to an annually adjusted wage cap ($137,700 for 2020), but Medicare taxes continue to apply beyond that threshold.
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Trump has said that he can suspend their collection, and on Saturday, he moved to make it so as part of a series of executive orders aimed at extending some pandemic relief efforts.
However, passing on the savings from a payroll tax cut to workers could be easier said than done, even with an executive action, tax experts said.
That's because while the tax code allows the Treasury Secretary to delay tax deadlines for up to a year during a federal disaster, a mere deferral of the taxes may prompt employers to simply retain the employees' share of levies rather than giving the money to workers.
"If you're an employer and [Treasury Secretary] Steven Mnuchin says, 'I don't need to see that money for a year,' what do you do?" asked Daniel Hemel, a law professor at the University of Chicago.
"You could give it to the employee, but then a year from now you might be on the hook for the money," he said.
The issue with a deferral via executive order is that there's no guarantee of forgiveness.
Stephen Moore, a member of the president's economic recovery task force, and Phil Kerpen, president of the Committee to Unleash Prosperity, touched on the issue in an Aug. 2 op-ed in The Wall Street Journal.
"Mr. Trump could also pledge to sign a bill — now or after the new Congress takes office on Jan. 3 —to forgive those repayments," they wrote.
That's a big "if" for employers.
"Maybe people won't want to do it," said Pete Isberg, vice president for government relations at ADP. "There's a possibility that Congress won't follow up with legislation that's consistent with the executive order and forgive the taxes that are deferred."
In that case, employers' attorneys will likely advise them that they are still liable for those payroll taxes, he said.
Distributing those taxes to employees could be a costly mistake for employers if the levies are only deferred.
They may have to come up with the money at a time when their own finances are still precarious.
"It's a significant obligation that in today's environment would be difficult for employers to assume," said Michael Trabold, director of compliance risk at Paychex.
Uncertainty over forgiveness might deter companies from participating in the payroll tax cut altogether – executive order notwithstanding.
"One thing we talked about internally was, 'Would all employers buy into it?'' Trabold said. "One of the fundamental credos from the IRS is that the employer is always responsible for paying the payroll tax."
The last payroll tax cut that went into effect – a temporary 2% reduction of the employee's share of Social Security taxes – was passed by Congress and signed into law by President Barack Obama in December 2010. It was in effect for 2011 and 2012.
Such collaboration seems unlikely now, especially as lawmakers focus on more immediate forms of aid that could help the millions of Americans who are out of work: another round of stimulus checks and enhanced federal unemployment benefits.
"The big difference is that 10 years ago, Congress passed that payroll tax cut," said Hemel. "Here, why would [House Speaker] Nancy Pelosi give Mnuchin this tax cut?
"If I'm an employer, why be confident that she would do that?" he said. "I think it's all dependent on Congress blessing it ex-post, and if they don't, it's a disaster for the employers."