Treasury Issues Guidance on Trump’s Payroll Tax Break

Treasury Issues Guidance on Trump’s Payroll Tax Break
U.S. Treasury Secretary Steve Mnuchin speaks to the media after meeting with the U.S. Senate Minority Leader and House Speaker on coronavirus relief at the U.S. Capitol in Washington, D.C. on Aug. 7, 2020. (MANDEL NGAN/AFP via Getty Images)
Emel Akan

WASHINGTON—The Treasury Department on Aug. 28 released long-awaited guidance for businesses on how to implement President Donald Trump’s payroll tax relief plan.

Trump signed an executive order on Aug. 8 that postponed the collection of the employee-side payroll taxes paid from Sept. 1 through the end of the year.

The three-page notice by the IRS clarifies that the payroll tax break applies only to wages below a biweekly threshold of $4,000. It also makes employers primarily responsible for paying the deferred taxes next year.

The good news for employers is that they only have to pay attention to the $4,000 per pay period, according to Pete Isberg, vice president of government relations at payroll processing firm ADP.

“That’s the only threshold. So that makes it a lot easier for employers to calculate and determine who’s eligible,” he told The Epoch Times.

The most surprising part of the guidance, according to tax experts, is that employers are liable for repaying the amounts deferred, while many had expected that the employees would pay them with their annual IRS Form 1040 tax return.

“Employers have the burden of accruing and accounting for the amounts that were deferred and then starting in January, evenly over a four-month period, withhold those taxes and pay them to the IRS,” Isberg said.

The implementation raises some questions for companies and employees.

“What if the employees leave their job? They might defer some taxes in September and October and then they might leave or change jobs. Does the employer have the opportunity to collect those deferred taxes before the person leaves?” Isberg asked.

The current Social Security tax rate is 12.4 percent, divided evenly between employers and employees, up to the taxable maximum of $137,700. The CARES Act signed into law in March allowed companies to defer the employer portion of payroll taxes from March 27, 2020, through the end of the year.

In order to provide some temporary relief for workers, Trump’s executive order permits companies to defer the employee’s obligation to pay the 6.2 percent taxes. However, implementation would be optional for companies.

The program might be optional for employees as well, according to Isberg, but that isn’t addressed in the guidance.

“Assuming that employer wants to give employees the option to defer or not defer—which they probably will—how do you administer that? That’s a question you actually have to pose to 100 million workers in the next few days.”

Explaining to employees, record keeping, and administering all these will be a big workload for employers, he added.

Workers will get a net pay increase of 6.2 percent from September to December if their employers opt into the payroll tax deferral.

The next year in January through April, however, it'll be exactly the opposite.

“They will start paying their 2021 Social Security taxes also in January, so it’s almost like they will have a double deduction for Social Security tax in the first four months of 2021,” Isberg said.

Trump said earlier that he expected Congress to pass legislation forgiving those deferred taxes. While the administration can delay the collection of taxes, only Congress can forgive those taxes permanently.

It’s unclear whether Congress will approve that. Neither the Republican HEALS Act nor the Democratic HEROES Act, which are currently being negotiated, includes a payroll tax cut.

The business groups urge Congress and the Trump administration to work together to provide permanent tax relief to employees.

“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,” business associations led by the U.S. Chamber of Commerce stated in a letter on Aug. 18.

“But under a simple deferral, employees would be stuck with a large tax bill in 2021.”

Emel Akan is a senior White House correspondent for The Epoch Times, where she covers the Biden administration. Prior to this role, she covered the economic policies of the Trump administration. Previously, she worked in the financial sector as an investment banker at JPMorgan. She graduated with a master’s degree in business administration from Georgetown University.