Is the President's Payroll Tax Deferral a Good Thing?

​On August 8, 2020 President Trump signed the “Memorandum on Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster”(https://www.whitehouse.gov/presidential-actions/memorandum-deferring-payroll-tax-obligations-light-ongoing-covid-19-disaster/). The memorandum directs the Secretary of the Treasury to “defer certain payroll tax obligations with respect to the American workers most in need”.  What’s this memorandum all about, who benefits, and is it a good idea?

Like an “Executive Order”, an “Executive Memorandum” has the full force of the law. To learn more about the difference between these two executive actions go to (https://guides.loc.gov/executive-orders/order-proclamation-memorandum).

What Does the Latest Presidential Memorandum Do: It allows employers to stop withholding Social Security taxes from employees’ paychecks for the rest of 2020. This would increase take home pay by 6.2%. Employers are still required to pay the 6.2% Social Security tax that they are responsible for. The program takes effect September 1, 2020 and ends December 31, 2020.   

Who is Eligible: Any employee whose wages or compensation is less than $4,000 during any bi-weekly pay period on a pretax basis, or an equivalent amount if not paid bi-weekly. If an employee’s pay fluctuates, they may participate during any pay period when the maximum is not exceeded.

Do the Deferred Taxes Need to be Repaid: Yes, all the Social Security taxes will need to be repaid in 2021. The president's memorandum directs the Secretary of the Treasury to explore ways to eliminate the obligation to pay these taxes back. When President Trump signed the memorandum, he said that he will forgive these taxes and make permanent cuts to the payroll tax if re-elected. But Congress would need to pass legislation to permanently reduce the payroll tax or forgive any taxes not paid under this program.

In order to clarify some of the questions about the Presidential Memorandum, the IRS issued guidance under “Notice 2020-65” (https://www.irs.gov/pub/irs-drop/n-20-65.pdf). The notice provides the following clarifications:

• Employers may choose not to participate. Federal employees and members of the military are required to participate. 
• Employees are required to repay the Social Security taxes between January 1, 2021 and April 30, 2021. This will be accomplished by increased payroll withholding by the employer during that period of time. Penalties and interest will begin to accrue on the unpaid taxes beginning May 1, 2021.
• Employers will be liable for the payroll taxes if employees can’t or don’t pay them back.  

Is the Payroll Tax Deferral a Good Thing: In my opinion no. There are lots of concerns that I have with the program. Here are a few:

• The tax deferral only helps those who are employed. The unemployed are the ones most in need of a cash infusion and they can’t participate. With the unemployment rate at about 8.4%, that’s tens of millions of ineligible people.
• Another large group of people who can’t participate are Gig workers, self-employed workers and private contractors. These folks pay their own payroll taxes, and typically not until they file their income taxes.  
• If an employee leaves a company before the deferred tax is repaid, the employer is most likely on the hook to the IRS for the tax bill. An employee may get laid off, fired, or simply quit the job after benefiting from the tax holiday, with no way to pay it back.  
• According to ADP, one of the nation’s largest payroll processors, any payroll changes such as the one currently underway, normally requires at least six months for an orderly programming transition. To put the tax deferral program into effect will create large administrative headaches for payroll departments.
• If President Trump does find a way to forgive the taxes deferred through this program, a serious fairness issue will be created.  How do you square it with the majority of workers who couldn’t, or wouldn’t participate in the payroll tax deferral?

​I’m not the only one against the president’s payroll deferral. On August 18, 2020 the U.S. Chamber of Commerce, National Retail Federation, National Restaurant Association, and nearly 30 other business groups sent a letter to Treasury Secretary Mnuchin, voicing their concerns. Chief among them were the serious hardships it could place on employees who would receive a large tax bill in 2021. The groups were also concerned about the administrative and legal obligations imposed on employers. These business groups indicated that they would recommend that their members continue withholding payroll taxes as before and not participate in the program.  

If President Trump is able to enact a permanent payroll tax holiday after January 1, 2021, as he suggested, it would have serious consequences on the longevity of the Social Security Trust Fund. According to the chief actuary of the Social Security Administration, a permanent payroll tax holiday would deplete the Trust Fund’s reserves by the middle of 2023  (https://www.ssa.gov/oact/solvency/VanHollenSandersWydenSchumer_20200824.pdf).

With all of the downsides to the president’s payroll deferral program, why would he even bother? It’s all political! The Congress is in a stalemate over additional pandemic relief spending, and the president wants to show that he is a man of action. The signing ceremony for the Presidential Memorandum was a great photo-op and it brings a lot of news coverage. News coverage of the president being “presidential” is about the best campaign coverage there is, and it doesn’t cost anything. Between now and election day, take any new policy statement or initiative with a grain of salt. We are in the middle of silly season.  
 
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Thanks,
Armchair American
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