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The Payroll Tax Holiday That Isn't


Some employees may see more take-home pay over the next few months. But it comes with a catch.

Amidst a stalemate between the two parties on Capitol Hill regarding additional COVID-related legislation, President Donald Trump on August 8 issued an executive memorandum policy that said U.S. workers would not have to pay their Social Security payroll taxes from September 1, 2020 until December 31, 2020.

The memo came with two immediate caveats: it only applied to employees who earn up to $104,000 annually ($2,000 a week) – about 90 percent of the U.S. workforce – and it would be up to each employer to decide whether or not their employees got to participate in the program.

Sounds great, right? After all, the Social Security levy is 6.2 percent of a worker’s total earnings up to $137,700 so this provision could mean extra money in Americans’ pockets … and therefore extra consumer spending to boost the struggling economy. And, as Politico has explained, Congress already had given employers a payroll tax break. Why shouldn’t employees have the same chance?

But with many large employers, including FedEx, UPS, Home Depot, JPMorgan Chase, CVS and others announcing they wouldn’t change their employees’ withholdings, turns out Americans and their employers were unmoved.

Why?

First of all, Americans who have paid attention to Washington’s marathon debate over coronavirus legislation – and who recall policies put into place during the United States’ last economic downturn – probably were expecting a payroll tax holiday.

The president’s order is no holiday. Instead, it is a payroll tax deferral – meaning that any employee who is allowed to take advantage of it will have to pay back their deferred taxes beginning in January. (A payroll tax holiday, like the lengthy one that was given at the tail end of the Great Recession, is a tax cut. The money never has to be repaid.) In other words: President Trump’s policy is more like the credit card you apply for in-flight to your vacation rather than a holiday itself.

Exactly how much would Americans who received the deferral owe? Kiplinger’s did the math. An employee who earns $25 an hour would postpone $1,116 in Social Security taxes between September 1 and December 31 if their employer took advantage of the policy.

And when would Americans have to pay back this loan?

In just a few months – in the form of a smaller paycheck. As The Hill explains, under guidance from the Internal Revenue Service, employers “will then need to recoup the deferred taxes by increasing the amount withheld from workers’ paychecks in the first few months of 2021.”

Congress could wipe out the debt if lawmakers wanted to, and U.S. House Ways and Means Ranking Member Rep. Kevin Brady (R-Texas) proposed legislation last week to do just that. But, given how hard it has been for Congress to agree on anything – and given that Democrats, not Republicans, control the Ways and Means Committee and the House itself – the smart money isn’t on that legislation making it to the president’s desk.

There are policy rationales for implementing a payroll tax deferral rather than a holiday, of course. The key argument is that a deferral has no long-term impact on the health of the Social Security Trust Fund, which, before COVID and barring any policymaker intervention, will be depleted in 2035. Budget hawks concerned about Social Security bankruptcy could line up again legislation like Rep. Brady’s.

That said, the president’s action does enjoy strong support among Americans. According to The Hill, about 70 percent of Americans approve of the president’s move to defer payroll taxes, which was coupled with more money for federal unemployment benefits. Businesses, on the other hand, are skeptical.

According to The New York Times, “Executives are spooked by the complexities involved in enacting the plan and the possibility that their workers – or the companies themselves – could face unexpected tax bills next year when the deferral expires.” Take this fact, for example: “If an employee left the company before the repayment was complete, the business would effectively find itself on the hook for the tax bill.”

Other observers are worried the White House did not explain the policy well enough, and that Americans may not understand that their payroll taxes would have to be paid back at some point. The New York Times notes that a U.S. Army captain wrote to Rep. Don Beyer (D-Va.), worried about the impact the policy would have on his soldiers. The captain said, “Many of the soldiers within the ranks live paycheck to paycheck, and if they are not aware that all of this money must be paid back next year, it could be ruinous to their financial health.”

Contrast that with the payroll tax relief Congress approved this spring for employers. As BDO explains, the CARES Act permits employers to defer payment of their own remaining 2020 Social Security payroll tax liabilities into 2021 and 2022. According to Politico, at least 40,000 employers have taken advantage of that provision. American Airlines said it will save $300 million while Chipotle could save $100 million. Pete Isberg, vice president of government affairs at ADP, which provides human resources management software and services, including payroll, called the CARES Act program “an interest-free loan from the IRS.”

If both programs serve as loans, why is one popular and another is not?

One very possible reason is that the president’s memo is constitutionally suspect while the CARES Act tax deferral is not.

Recall that, under Article I, Section 7, Clause 1 of the U.S. Constitution, all policies related to revenue must originate in the U.S. House of Representatives – a step that obviously did not happen with President Trump’s memo, which originated and ended in the White House..

Indeed, congressional Democrats are challenging President Trump’s payroll tax deferral.

As The Hill reported, two weeks ago Senate Minority Leader Charles Schumer (D-N.Y.) and Senate Finance Committee ranking member Ron Wyden (D-Ore.) asked for an expedited determination about whether the Treasury Department and IRS's guidance implementing the payroll-tax deferral is a “rule” (or regulation) for purposes of the Congressional Review Act (CRA). Yesterday, the GAO – which is the nonpartisan legislative branch government agency that provides auditing, evaluation, and investigative services for the United States Congress – determined that it is.

Why is this important? Because, as The Hill noted, “Under the CRA, Congress can vote on measures to disapprove of recently issued rules produced by federal agencies.” A vote to disapprove by both chambers of Congress would overturn the president’s payroll tax order.

What are the chances of that happening? Could Congress get rid of the deferral just as the Republican National Committee, the executive branch, and a handful of employers have started implementing it?

That question, of course, takes us back to where the president’s policy began in the first place.

President Trump issued his executive memo in part because of frustration that Congress had gotten nowhere in their negotiations on a fourth COVID relief bill. (Though, to be clear, various policies related to the payroll tax have been an idea the White House has been pushing since the early days of the coronavirus pandemic.)

House and Senate lawmakers are still at an impasse on the cost and components of the next coronavirus spending bill. If they cannot agree on that – something that likely would be a net positive for Americans, businesses, and the economy – it is unlikely they will be able to agree on a contentious CRA reversal of the president’s payroll tax deferral.

So, if you notice a few extra dollars in your paycheck over the next few months: start saving. That money may not be yours to keep.

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