The payroll tax holiday will kick off in two weeks. Your employer isn't ready

  • 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 battle.

The president signed an executive order on Aug. 8 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 Medicare.

Social Security taxes are subject to an annually adjusted wage cap ($137,700 for 2020), but Medicare taxes are  assessed beyond that threshold.

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

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

It's looking less likely that they'll be ready in time.

"It's getting close to Sept. 1, and if [guidance] is issued any further beyond today or tonight, it'll be harder for employers to do something about it," said Pete Isberg, vice president for government relations at payroll provider ADP.

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

"Even if guidance were available today, the programming changes are substantial in scope," the trade association wrote.

To meet the guidance, 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 — but not others, they said.

"Not all employers and payroll systems will be able to make these complex changes by Sept. 1," the consortium said.

Questions linger

While Trump handed down the deferral through an executive order, there's no guarantee that the employees' share of the payroll tax will be forgiven.

This has created uncertainty among payroll providers and employers. For starters, employers are generally responsible for withholding and depositing payroll tax.

If the employer doesn't withhold employees' share of taxes and the IRS can't collect them, then the worker is on the hook for the tax.

"If this were a suspension of the payroll tax so that employees were not forced to pay it back later, implementation would be less challenging," wrote the U.S Chamber of Commerce in an Aug. 18 letter to Senate Majority Leader Mitch McConnell, House Speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin.

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"But under a simple deferral, employees would be stuck with a large tax bill in 2021," the group wrote. "Many of our members consider it unfair to employees to make a decision that would force a big tax bill on them next year."

An employee earning $50,000 per year would be able to pocket $119 per paycheck if Social Security taxes were deferred. That adds up to $1,073 over nine pay periods, the Chamber said.

The employee will have to fork that money over to the IRS in 2021 if there's  a deferral but 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 employee if you want us to do this for you, let us know and they have to elect the deferral?" asked Isberg. "We have no idea what to expect."

Saving Social Security

Next year's tax bill isn't the only thing on the minds of savers.

Critics of the payroll tax holiday have also raised concerns by groups such as AARP, which advocates for older Americans,  that massive changes, including benefit cuts, may be ahead for Social Security if the tax deferral were made permanent.

"AARP believes the payroll tax deferral established by the recent executive action must remain temporary," the group wrote in an Aug. 21 letter to Mnuchin.

"Second, it is imperative 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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