Payroll tax deferral not practical, say many employers

WASHINGTON — After a month with no deal from Congress to extend COVID- 19 relief programs, employers will have the option beginning on Tuesday to defer withholding of certain payroll taxes for the next four months, a move by President Donald Trump intended to unilaterally provide benefits after talks among lawmakers broke down.

Under guidance published Friday by the Internal Revenue Service, employers have the option to temporarily halt withholding and paying a 6.2% tax on employees that funds Social Security benefits. But it remains unclear how many employers will decide to defer collection and payment of such taxes, especially after a coalition of business groups on the national level called the idea “unfair” and “unworkable.”

One of the chief complaints is that the taxes will ultimately have to be paid by next April. Because Congress has the sole power to reduce taxes, the Trump administration has the authority only to shift when tax payments are collected. While paychecks would be larger during the deferral period from Sept. 1 until Dec. 31, paychecks would be smaller during the first four months of 2021.

In an Aug. 18 letter to Congress and the U. S. Department of Treasury, the U. S. Chamber of Commerce and more than 30 trade associations wrote that many of their members will likely decline to defer the tax. The letter estimated workers making $ 50,000 a year could owe nearly $ 1,100 in payroll taxes in 2021.

“Many of our members consider it unfair to employees to make a decision that would force a big tax bill on them next year,” the organizations wrote. “It would also be unworkable to implement a system where employees make this decision.”

Mr. Trump, who has long said he wants to cut payroll taxes, included the deferment in a package of executive orders signed Aug. 8, a week after talks broke down on Capitol Hill.

Among the deferment option and other measures, the president ordered an extension of supplemental unemployment benefits using funds transferred from the Federal Emergency Management Agency.

Pennsylvania labor officials, whose application was approved last week to receive a $ 1.5 billion FEMA grant, are racing to build a new system to provide a supplemental $ 300 a week benefit — half the $ 600 weekly benefit that was set up by Congress in March and expired at the end of July.

The deferral of the payroll tax funding Social Security, which was not among any congressional relief package, is the most controversial move.

Employers and employees split the responsibility for a 12.4% tax that funds Social Security benefits. ( An employee making $ 60,000 annually would pay $ 3,720 in Social Security taxes.)

Mr. Trump’s executive order applies to the employee’s 6.2% share of the Social Security tax and would affect employees whose pretax wages or compensation during any biweekly pay period is less than $ 4,000.

The IRS guidance confirmed that employers would, beginning in January, eventually have to withhold and pay any payroll taxes that were deferred from Sept. 1 to Dec. 31 of this year.

That means paychecks would be smaller as employers withhold deferred taxes on top of regularly owed taxes.

There should be no impact to income tax liability, as Social Security taxes aren’t deductible or an adjustment to income.

The guidance, roughly two pages, also does not provide specific instructions for employers whose employees are seasonal or who may depart before the end of 2020 — before paying their deferred taxes in full. The IRS stated employers must “make arrangements” to collect the deferred tax from employees, if necessary.

Business groups have repeatedly called on Congress to provide tax relief, among other provisions, in an upcoming COVID- 19 package. Lawmakers in both parties have expressed opposition to a payroll tax cut in any new legislation.

Reached Monday, the National Federation of Independent Business, which represents 1,500 small businesses in Pennsylvania, declined to take a stance on the payroll tax deferment.

The group is focusing on legislative priorities to be passed by Congress and signed by the president, a spokesperson said.

A statement from the Greater Pittsburgh Chamber of Commerce said it “joins the U. S. Chamber of Commerce in calling on Congress and the administration to work together in order to provide tax relief to workers that is both impactful and provides clarity on the responsibilities and obligations of all parties invoked in the payroll process.”