Implications of Trump's Payroll Tax Delay

August 12, 2020 | Payroll Tax, Payroll Tax Credit, Social Security

On Saturday, August 8th, 2020, President Trump signed four executive orders including a directive to defer collections on Social Security payroll tax for workers making less than $104,000 annually. This executive order comes in the midst of Congress strategizing on an additional pandemic relief plan. 

Background and Details

Workers usually pay 6.2% of their wages up to $137,000 annually to fund Social Security. The executive order would halt this withholding starting September 1st through the end of the year in order to increase take home pay and encourage spending. It will not apply to the unemployed or those who work as contractors. The IRS and Treasury department are in charge of ironing out the details and developing a plan to implement this directive. 

Potential Concerns and Challenges

There are several questions that come to mind when considering the feasibility of this for the employer, the employee, Social Security, and the Payroll Tax Credit.

For the Employer - Reprogramming systems to not withhold payroll taxes may be cumbersome and a potential gamble considering the current uncertainty of the payback structure. As of now Trump wants to forgive the tax owed and make permanent cuts to the payroll tax upon reelection but there are numerous hurdles in his way besides the November ballot. Mainly, both houses of Congress would have to agree on a bill that would forgive the uncollected taxes and pass the legislation, regardless of who sits in the White House. Given the comments from legislators on both sides of the aisle, it’s hard to believe such a thing will happen in the near future.

These are things a company must consider when deciding on taking advantage of this incentive. Since this is an option, employers may opt to not even participate in order to mitigate risk.

For the Employee - What happens if an employee cannot afford to pay back the taxes? There is a chance certain employees may not even spend the extra cash for fear of not being able to pay it back when the time comes. 

For Social Security - With less money being funneled into Social Security, there are concerns that this could negatively affect a department that has already been hit with financial concerns. 

For the Payroll Tax Credit - Currently qualified small businesses can elect to use a portion or all of their R&D tax credit to offset future payroll taxes (also known as the Payroll Tax Credit). Payroll tax credits currently carry forward indefinitely so any credits a start-up company has accrued will be used to reduce future payroll taxes. If payroll taxes are eliminated entirely and permanently, we will have to wait and see if these credits would revert back to income tax credits.

These are a few of the potential issues that the IRS will have to consider when developing a plan to implement this executive order. At the end of the day, it will be up to the employer and the employee to determine what would be of best interest for their unique situation.

Please reach out to us if you have any questions. The PTR team will stay updated on what comes of this in the coming weeks.