The Payroll Tax Holiday Will Kick Off in Two Weeks. Your Employer Isn’t Ready

KEY POINTS

  • President Trump signed an executive order calling for a deferral of the employees’ portion of the payroll tax from Sept. 1 through the end of the year.
  • Currently, employers and employees share responsibility for a 12.4% levy that funds Social Security and a 2.9% tax to support fund Medicare.
  • Payroll companies, the U.S. Chamber of Commerce and other business associations say it would be difficult to implement the deferral. They’re concerned about the liability employers and employees may face.

Employers and payroll companies have less than two weeks to put President Donald Trump’s payroll tax deferral in place. It’s looking like an uphill struggle.

The president signed an executive order on Aug. 8 requiring deferral of the employees’ portion of the payroll tax from Sept. 1 through the end of the year.

Currently, companies and employees share duty for a 12.4% levy that funds Social Security and a 2.9% tax to support Medicare.

Social Security taxes go through an year adjusted wage cap ($ 137,700 for 2020), however, Medicare taxes are assessed beyond that limit.

The executive order applies particularly to the Social Security tax and would affect employees whose bi-weekly pay is less than $4,000 on a pretax basis.

Employers and payroll business are still awaiting final assistance from the IRS on how this will work.

It’s looking less most likely that they’ll be all set in time.

“It’s getting close to Sept. 1, and if [assistance] is provided any additional beyond today or tonight, it’ll be harder for companies to do something about it,” stated Pete Isberg, vice president for federal government relations at payroll supplier ADP.

To that impact, the National Payroll Reporting Consortium– of which ADP is a member– highlighted its concerns in an Aug. 20 statement.

“Even if guidance were offered today, the program changes are significant in scope,” the trade association composed.

To meet the assistance, payroll companies would have to recalculate the payroll tax in the middle of a quarter and have it apply to some employers and some workers– however not others, they said.

“Not all companies and payroll systems will be able to make these intricate changes by Sept. 1,” the consortium said.

Questions linger

While Trump handed down the deferment through an executive order, there’s no warranty that the employees’ share of the payroll tax will be forgiven.

This has created unpredictability amongst payroll providers and employers. For starters, companies are normally responsible for withholding and depositing payroll tax.

If the employer does not withhold staff members’ share of taxes and the IRS can’t gather them, then the employee is on the hook for the tax.

“If this were a suspension of the payroll tax so that staff members were not required to pay it back later, implementation would be less difficult,” composed the U.S Chamber of Commerce in an Aug. 18 letter to Senate Bulk Leader Mitch McConnell, House Speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin.

“However under a basic deferral, workers would be stuck to big tax costs in 2021,” the group composed. “A number of our members consider it unfair to staff members to decide that would force big tax costs on the next year.”

A staff member earning $50,000 annually would be able to pocket $119 per paycheck if Social Security taxes were delayed. That amounts to $1,073 over 9 pay periods, the Chamber stated.

The employee will need to fork that cash over to the IRS in 2021 if there’s a deferral however no forgiveness of the tax.

Even the execution of the payroll tax cut on the part of the employer remains uncertain.

“Do you default everyone in, so they’re all deferred, or do you ask each staff member if you want us to do this for you, let us understand and they need to elect the deferment?” asked Isberg. “We have no idea what to anticipate.”

Conserving Social Security

Next year’s tax expense isn’t the only thing on the minds of savers.

Critics of the payroll tax vacation have likewise raised issues by groups such as AARP, which advocates for older Americans, that enormous changes, consisting of advantage cuts, might be ahead for Social Security if the tax deferral were made permanent.

“AARP believes the payroll tax deferment developed by the current executive action should remain short-lived,” the group composed in an Aug. 21 letter to Mnuchin.

“Second, it is vital the administration ensure Social Security’s Trust Funds are held harmless from the loss of payroll contributions and interest due to the executive action.”

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