Workers may — or may not — see a change in take-home pay starting in September. President Donald Trump signed a memorandum on Aug. 8, touted to be a strategy for dealing with COVID-19. It orders the Treasury Department to defer Social Security and Medicare payroll taxes (7.65%) for those making less than $4,000 per biweekly pay period.
This is a delay of paying the tax, effective through Dec. 31. Starting in January, paychecks would go down until all delayed amounts are collected by April 30, 2021. Beginning on May 1, 2021, penalties would be assessed for unpaid balances.
Only Congress can cancel the tax, as it did for a limited period to stimulate consumer spending during President Barack Obama's tenure. Trump's order is not the same because he did it without Congress, where the suggestion met bipartisan opposition, though he denies this. He will claim that Congress can forgive it in the future, but there is not much likelihood of that.
IRS guidelines for the delay create many complications and unresolved issues (Journal of Accountancy, Aug. 8). For example, the order applies only to the employee's portion of the tax, not the employer's matching amount.
Deferment is to be voluntary. The complications of letting individual employees make this decision would be beyond most companies' payroll capacities. So companies would need to make the decision for their employees.
If employers decide to take the “tax holiday” for their employees, they will need to double the withholdings starting in January. This will come just after Christmas, when many budgets are already stretched.
What if an employee's portion is deferred for the rest of 2020 but he then leaves employment before the tax can be repaid? Is the employer liable for the unpaid amount?
Taxes are deferred only on amounts up to $4,000 per biweekly payroll. For those whose wages vary, calculations would need to be done every payroll to tax the amounts that exceed $4,000.
On Aug. 18, the U.S. Chamber of Commerce and more than 30 trade groups sent a letter to Congress and the Treasury that expressed opposition to the plan and stated that many of their members are likely to decline the deferral. In addition to these issues, there are multiple other reasons not to take this lightly.
Trump has repeatedly expressed his desire to do away with this payroll tax. This is his scheme for eliminating Social Security and Medicare altogether. The chief actuary for the Social Security Administration told Congress recently that elimination of the tax would make Social Security insolvent by mid-2023.
Deferral might produce a short-term economic stimulus, but this is not part of a comprehensive economic plan or one that Congress sees as a viable option. According to The Washington Post (Aug. 31), “Lawmakers, tax experts, business leaders and payroll-processing companies have raised concerns about its implementation, raising the potential that Trump's bid to boost workers' paychecks may result in little economic gain.”
Trump floats this as a strategy for dealing with the economic devastation of COVID-19, but it does nothing to help the 10% of Americans who are unemployed and receiving no paychecks.
And there are many concerns about the benefit-cost ratio of the plan. How much will it actually help with COVID-19 economic recovery? What will be the economic impact come January when double taxes must be withheld, drastically reducing consumer spending power? How much extra will all of this cost employers as they grapple with the payroll convolutions?
Could it be that this is primarily a campaign trick allowing Trump to declare that he has “cut your taxes” and his Trojan horse for eliminating Social Security and Medicare altogether?
Perhaps, but maybe we should take him at his word: “It helps people greatly. It helps our country get back, and anybody that would say anything different, I think, is very foolish. Everybody wanted it. By the way, the Democrats want it, the Republicans want it ... and the very important thing is, the people want it and the people need it, actually,” according to an interview he gave ABC News on Aug. 8.
Or perhaps not.
Sherry Buchanan lives in Joplin.