Trump's payroll tax holiday could shrink workers' take-home pay early next year since employers have to collect twice as much from paychecks

  • Trump's payroll tax holiday set to start Tuesday could shrink the paychecks of millions of workers early next year since the federal government says employers are on the hook for any missed payments. 
  • New guidance from the federal government released last week sets up an April 30 deadline for the deferred taxes.
  • Experts say employers that opt in would have to withhold taxes twice early next year.
  • Visit Business Insider's homepage for more stories.

President Donald Trump's drive to enact a payroll tax holiday for millions of workers could shrink paychecks early next year since employers are liable for the missed payments — and they would have to be paid back by the end of April 2021.

 The Treasury Department released guidance in conjunction with the IRS on Friday to help companies better understand their legal obligations if they decide to carry out the deferral. Trump signed the directive in early August, and triggered significant criticism from many business groups and unions who say it's very difficult to implement.

Under the memorandum, people earning under $4,000 every two weeks — or below $104,000 yearly — won't have to pay the 6.2% tax out of their paychecks, which the government uses to finance Social Security.  The holiday is set to begin Tuesday and end on December 31.

Read more: MORGAN STANLEY: The government's recession response has the stock market heading for a massive upheaval. Here's your best strategy to capitalize on the shift.

The guidance resolved some issues but opened others that could scare off many employers from taking part in the tax holiday to avert potential legal headaches. Businesses would have to foot the bill for workers who leave their jobs, since they would not be subject to withholding early next year.

Trump has pledged to "terminate" the tax so workers can actually keep the money and experience a wage bump. But that requires Congress to step in with legislation to waive the taxes, which many lawmakers in both parties oppose.

Garrett Watson, a senior policy analyst at the right-leaning Tax Foundation, said companies withholding the payroll tax would have to double the amount they take out of paychecks early next year so employees can pay back what they owe.

"They'll have a slightly higher paycheck if their employer opts in from September 1 to December 31," Watson told Business Insider. "But they'll have a slightly lower paycheck from January 1 to the end of April."

The tax burden falls on employers for deferred payments

The guidance removed the prospect of workers getting stuck with making a large, one-time payment to the IRS next year, stretching out their payments over four months. It placed the burden on employers to administer the deferral and maintain their tax obligations.

"How does an employer have any confidence participating in this that they're not gonna be left holding the bill?" said Seth Hanlon, a senior fellow at the left-leaning Center for American Progress. "There's no way to resolve that and this guidance doesn't give them assurances."

It sets the foundation for employers to recoup money from workers who switch jobs by making "arrangements." It's not clear what that entails. KPMG, an accounting firm, said in an analysis that state labor laws or union contracts may limit an employer's ability to recover any wages owed.

The US Chamber of Commerce and scores of other trade associations in entertainment and retail said in a recent letter to the White House and top congressional leaders they were unlikely to implement the deferral. They called it "unworkable"  to design a system where employees can opt out if they choose.

"Most employers are gonna say, 'why would we do this?' Hanlon said. "It's pointless just for a short-term loan to the employee. It creates a huge amount of hassle and potential tax liabilities."

The federal government is starting the deferral for around 1.3 million federal employees, The Washington Post reported.

Source: Read Full Article