The IRS clarified on Friday that companies will be obligated not to take Social Security taxes from paychecks starting next week running through the end of the year.
Nearly all Americans are taxed 6.2% per check to go toward Social Security. For now, barring any action from Congress, most Americans will see larger paychecks through the end of the year. The guidance is based on an executive order signed earlier this month by President Trump in hopes of stimulating the economy.
The Social Security tax deferment is applicable to workers who make up to $4,000 on a bi-weekly basis. Those making more than $4,000 every two weeks will continue to have their Social Security taxes withheld from checks.
The deferment is not an actual tax cut, and because the deferment was done via executive order rather than an act of Congress, the taxes will need paid back by April 30, 2021.
The White House has said they would like to see the elimination of the Social Security payroll tax be made permanent in an effort to lower the tax burden. Opponents say that eliminating the tax on Americans would make Social Security insolvent.
Stephen Goss, the chief actuary for the Social Security Administration, told the US Senate this week that a hypothetical bill that would make the tax deferment permanent would cause Social Security to no longer be able to make payments to beneficiaries by the middle of 2023.
For employees making $30,000 a year, the elimination of Social Security taxes would result in an extra $71 per paycheck every two weeks. Assuming the employee has eight paychecks left in 2020, that would result in $572 in taxes deferred in 2020, which would be repaid in 2021. For employees making $60,000 per year, those figures would be doubled.
In a late Friday press release, the Treasury Department issued long awaited guidance on President Trump’s August 8 payroll tax holiday memorandum. The notice from Treasury allows, but does not force, employers to postpone payroll taxes for the period starting September 1, 2020 and ending December 31, 2020. Employers would then be required to remit the deferred taxes between January 1, 2021 and April 30, 2021. Following the direction of Trump’s memo, the payroll tax holiday only applies to individuals with wages below a bi-weekly threshold of $4,000, which translates to an annualized salary of below $104,000 a year (there are 26 pay bi-weekly pay periods each year).
Employers have been waiting for weeks for the Treasury Department to issue guidance. According to Bloomberg, the notice was delayed due to differences between the White House and the Treasury Department over who should be required to repay the deferred taxes. The White House was strongly lobbying for employers to be responsible for paying back the 6.2 percent Social Security tax. In the notice issued by the Treasury Department, employers are indeed responsible for withholding and paying back any deferred taxes; however, the Treasury’s note included a sentence saying that, “if necessary, the Affected Taxpayer [the employer] may make arrangements to otherwise collect the total Applicable Taxes from the employee.”
Moreover, it appears as if the Treasury Department is instructing “employers to not withhold now through 12/31, and then double withhold from 1/1 to 4/30,” according to Joe Bishop-Henchman, Vice President of Tax Policy at the National Taxpayer Union Foundation. This could provide some relief to employees who are struggling at the moment, but could create a significant hardship in 2021 if those individuals have twice as much withheld from their paycheck. It should also be noted that the payroll tax deferral will do nothing to help the 28 million Americans who are currently unemployed and, therefore, not receiving paychecks or having payroll taxes withheld (unemployment benefits are not subject to payroll taxes).
While the guidance from Treasury is welcome, it is non-binding and employers will need to decide whether to opt-in. Many companies are expected to opt out of participating to avoid dealing with the complexity of implementing a payroll tax deferral and saddling employees with large tax bills next year. Moreover, given that Treasury’s guidance puts the responsibility on employers to pay back deferred taxes, many may not want to take on the additional risk of doing so.
Large companies, such as Walmart WMT +2.7%, have been waiting for guidance from the Treasury Department before deciding how to proceed. Many industry groups, including the U.S. Chamber of Commerce, expressed skepticism about Trump’s executive action and have opposed it. “Under current law, the E.O. creates a substantial tax liability for employees at the end of the deferral period,” the Chamber wrote in a letter to Congress and Treasury. “Without congressional action to forgive this liability, it threatens to impose serious hardships on employees who will face a large tax bill as a result of deferral.” Or as Seth Hanlon of the left-leaning Center for American Progress put it, “it’s really, really hard to see why employers would choose to participate in this mess, except if they have some political reason to do so. All it does is create risk, hassle, and uncertainty for them.”
One entity has already indicated it will implement the payroll tax deferral. The National Finance Center, a federal government agency division under the United States Department of Agriculture, said in an August 21 memo it will begin deferring Social Security taxes for all employees who are eligible for the initiative. It does not appear that employees will have a say and be able to opt-in or opt-out. “It might give you pause if you’re saying, ‘gee, I’m going to owe all this money back,’” Michael Randall, head of the National Association of Agriculture Employees, told Politico. “I’m hoping that it’s not going create some hardship down the line.”
Effect on Social Security Unclear
After Trump signed the memo on August 8, there was speculation that he was going to “terminate” Social Security if re-elected, partly due to the language he used in his press conference. “If I’m victorious on November 3rd, I plan to forgive these taxes and make permanent cuts to the payroll tax,” Trump said, according to the Washington Post. “I’m going to make them all permanent.” He continued saying that “at the end of the year, on the assumption that I win, I’m going to terminate the payroll tax.”
For now, Treasury’s guidance simply calls for a payroll tax deferral. Assuming employers opt-in and repay the taxes in early 2021, there would be no threat to Social Security. Some have pointed to how the payroll tax deferral could still create incremental risk for the Social Security Trust Fund; for example, if an employer doesn’t withhold funds and then goes out of business early next year.
Trump’s August 8th order also instructed Treasury Secretary Steven Mnuchin to “explore avenues, including legislation, to eliminate the obligation to pay the taxes deferred.” This would turn a tax deferral into a tax cut, but would require an act of Congress. Given the fact that Congress can’t pass legislation with close to 30 million people unemployed and the country reeling from the economic effects of the coronavirus pandemic, the odds of that happening may not be high.
If such legislation were to pass, there could be a threat to Social Security. The key question will be whether Congress will include language that reimburses the Social Security Trust fund from general government revenue. When Obama and Republicans struck a compromise and instituted a temporary payroll tax cut, it did not affect the long-term health of Social Security because revenue that would have normally funded the Social Security Trust Fund was reimbursed out of general government revenue. This kept the trust from losing assets, but also meant that Social Security had “a direct role in rising deficits for the first time.
Representative Don Beyer (D-Virginia) summed up the guidance well: “The Trump Administration’s “guidance” — which reads like a homework assignment conceived and written at the last minute — shows what bad policy the payroll tax order is,” he tweeted. “A headache for businesses, and likely an unexpected large tax bill for many workers. This won’t help anyone.”