The brief payroll tax suspension memo signed over the weekend by President Trump leaves the IRS and Treasury in charge of making it all work in practice, a job that observers say will be no easy task.
The memo, signed August 8, directs Treasury to use its authority to defer payroll tax obligations, including the withholding, deposit, and payment of employees’ share of payroll taxes that would be paid between September 1 and December 31.
Richard R. Winchester of Seton Hall University Law School described the memo as an “ill-conceived idea that will create headaches for almost everyone, without providing meaningful relief to the people who need it most.”
Trump has said he intends to pressure Congress to forgive the deferred payroll taxes, but Congress has “already signaled that it’s not crazy about the idea in the first place,” Winchester told Tax Notes. And if Congress doesn’t act, that would leave many employers and employees in the lurch, he said.
Merry Christmas
If the 6.2 percent employee payroll tax isn't paid during the prescribed period and instead accumulates, that adds up to over a week’s worth of pay that an employee will be on the hook for paying once the deferral period is over, Winchester said.
Come January 2021, an employee might not receive a paycheck for the first week or two that month, when all those deferred taxes become due, according to Winchester.
Eric Toder of the Urban-Brookings Tax Policy Center similarly highlighted the prospect of a mega tax bill at the end of the year. “The one aspect of it that is really ugly is if people are ending up having to pay this big tax and basically getting no paycheck at the end of the year. So this is their Christmas bonus?” he said.
“Treasury’s really going to have to think this through,” Winchester continued, noting that it had just three weeks to get its plan in order. He suggested Treasury might end up writing guidance allowing the payroll tax debt to be repaid in installments rather than all at once, but either way, the government would be in the position of forcing workers to live on less during the early weeks of 2021.
Winchester also wondered what would happen to workers who work for a company during the payroll tax holiday in 2020, but no longer work with the company in 2021 when the tax debt has to be paid. “Does that debt simply disappear without being satisfied?” he asked. “If so, that would appear to create an incentive for workers to quit their jobs for new employment during the last week or two of December.”
Toder said that ultimately, the employee share of the payroll tax is owed by the employee, even if the employer typically withholds it.
Toder suggested that the IRS would have to set up some kind of system for taxpayers to report unpaid payroll taxes, noting that there’s precedent for it: If a taxpayer works for a foreign employer, they have to pay payroll taxes on any wages earned in the United States. But the IRS would still have to get the word out to taxpayers and update forms to ask that question, he said.
Toder also observed that it wasn’t clear how Treasury will defer the payroll tax obligations, whether employers will be required to comply, or if there would be some sort of system for opting in or out.
The IRS and Treasury will also have to contend with the issue of credit toward Social Security benefits, because those benefits are tied to work history, Winchester said.
Save the Dates
Trump initially said over the weekend that the payroll tax suspension would be retroactive to either July 1 or August 1, but the memo ultimately only specified the period beginning September 1 through December 31.
“I would just disregard that,” Winchester said, explaining that unless Trump signs another memo, the text of the current memo itself is clear that it would only apply prospectively.
The memo also directs Treasury to explore ways to eliminate the deferred payroll tax obligation. Toder dismissed the suggestion that Trump could achieve that goal through anything but legislation. “I’m quite sure he can’t decree a tax cut,” Toder remarked.
Cuts, Cuts, Cuts
Trump also announced August 7 that if reelected in November, he would “plan to forgive these taxes and make permanent cuts to the payroll tax.”
Later in the weekend, National Economic Council Director Larry Kudlow maintained that Trump was referring only to cutting payroll taxes by forgiving the deferred taxes. “The [payroll] tax is not going away. We’re still going to have Social Security taxes,” he said August 9 on CNN’s State of the Union.
However, when asked on August 10 about his comments, Trump seemed to double down on his statement, telling reporters he might push for the payroll tax cut to become permanent. “We'll take it out until the end of the year, and then I’m going to make a decision as to, number one, an extension, and, number two, making it permanent and no reimbursement,” he said.
Speaking again the evening of August 10, Trump said his administration would pursue a capital gains tax cut and income tax cut for low- and middle-income families. “You’ll be hearing about that in the upcoming few weeks, and I think it’ll be very exciting,” he said.
Trump didn’t specify if he would pursue those tax cuts through legislation or through the exercise of executive authority. Last year he considered using executive authority to index capital gains to inflation.
The White House didn’t respond to a request for clarification by press time.
The U.S. Chamber of Commerce used the occasion of the memo’s signing to urge Congress, which has been deadlocked on negotiations over a phase 4 coronavirus relief package, to act. Trump’s executive actions are well intentioned, but they are “no substitute for Congressional action,” the chamber’s Neil Bradley said in a statement. “There is no alternative to Congress legislating and no excuse for their inaction,” he said.
Kevin Kuhlman of the National Federation of Independent Business likewise said he “hopes that the administration effort will spur congressional action” on another relief package.
Follow Jonathan Curry (@jtcurry005) on Twitter for real-time updates.