Trump shifts pressure on next Congress to forgive payroll tax deferral

WASHINGTON (Sinclair Broadcast Group) — Pay me now or pay me later or take a gamble that the next Congress will agree to forgive the debt. That seems to be the proposition behind the Trump administration's Social Security tax deferral plan that formally took effect Tuesday.

When Congress and the White House found themselves at an impasse over a new coronavirus relief package and talks of a fresh round of stimulus checks had ground to a halt, President Donald Trump announced he would take action.

On Aug. 8, Trump signed an executive order directing the Treasury Department to allow companies to stop withholding the 6.2% Social Security tax from employees' paychecks until the end of the year.

"This modest, targeted action will put money directly in the pockets of American workers and generate additional incentives for work and employment, right when the money is needed most," Trump said in his directive.

Democrats were joined by a few Republicans in opposing the order that one GOP senator described as "unconstitutional slop."

Under the plan, a worker making $50,000 per year would see an additional $120 in take-home pay per biweekly pay period for the last four months of the year. Generally, any worker making $2,000 per week or less, or an annual salary below $104,000, would see a boost in their paychecks if their employer chose to participate in the program.

Far from being an economic stimulus, all of the money would have to be repaid. That's the big difference between deferral and forgiveness.

This is not like previous payroll tax holidays that were approved by Congress; this will have to be repaid, explained Derek Klock, a finance professor at Virginia Tech's Pamplin College of Business.

"For our most financially vulnerable, this is a windfall that is being taken back very, very quickly," Klock explained. "For those among us that are living paycheck to paycheck, it can be dangerous, if not made permanent."

After seeing a boost in paychecks in the final months of 2020, employees would see wage losses in the first four months of the new year. The Social Security portion of their that portion of their payroll taxes double. The employee making $50,000 per year would owe more than $2,100 — repaying last year's taxes plus current taxes. Workers at the highest end of the income spectrum could owe more than $4,400.

According to guidance issued last week by the Internal Revenue Service, employers, not individual employees, would be responsible for repaying the taxes, just as they are responsible for withholding them. After the four-month period ends, companies would have the next four months to recoup the lost taxes, the IRS explained.

If the employer isn't able to repay the taxes in full by April 30, they will be hit with additional fees, penalties and interest payments starting May 1. To deal with the additional taxes, the IRS suggested employers "may make arrangements to otherwise collect the [taxes owed] from the employee."

Employees that get a paycheck boost from tax deferral should understand that the money they get over the next four months is a loan, explained Janet Holtzblatt, a senior fellow at the Urban-Brookings Tax Policy Center.

"To the extent to which there's any stimulus effect from this, it's going to be offset in the opposite direction in January for the next four months," Holtzblatt noted. "This is a Social Security payroll tax loan and people are going to have to begin repaying it just as their Christmas bills come due."

For these and other reasons, few employers appear to have taken up the Trump administration on its offer.

"Every employer I’ve talked to has said we are not going to do this," said the National Academy of Social Insurance CEO Bill Arnone in an interview with Yahoo Finance. "It is not good for administrative complexity, and worse, it's an employee relations disaster."

Large payroll processors were confused by the presidential order and waited close to three weeks before the Treasury and IRS released follow-up guidance about implementing the tax deferral.

Employees are encouraged to speak with their employers about whether they are participating in the tax deferment and prepare for smaller wages at the start of next year if they are.

After the guidance was released, employers and staffing firms were left with important unanswered questions. For example, what happens if an employee leaves a company before repaying the Social Security tax? Are those costs taken out of the employee's final paycheck or passed on to others in the company?

A group of about more than 30 industry trade groups, including the U.S. Chamber of Commerce, sent a letter to Treasury Secretary Steve Mnuchin and congressional leaders objecting to the plan as "unfair to employees" and "unworkable" for employers.

"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," the coalition wrote. "But under a simple deferral, employees would be stuck with a large tax bill in 2021."

Given the skepticism and outright opposition to the president's directive, it appears that many private sector employers are going to opt-out of the president's tax deferral plan. That does not appear to be the case for federal employees.

According to reports, federal agencies will be required to defer their employees' Social Security taxes. "There is no opt-out or opt in-option," read an email sent to employees at the Defense Contracting Management Agency and obtained by Federal News Network.

It's estimated that most of the federal government's 2.1 million civilian workers would be subject to the payroll change. It's unclear if it would impact the country's 1.4 million active-duty military personnel.

"[F]ederal public servants are being used as guinea pigs," a group of Democratic lawmakers wrote in a letter to the Treasury, Agriculture Department and Office of Personnel Management.

Putting so many workers on the hook could be a way to build pressure on Congress to approve tax forgiveness and make the temporary tax deferrals permanent.

In his speech announcing the executive order in August, Trump promised that he would forgive the taxes and make permanent cuts to the Social Security payroll tax if he was reelected in November.

"Obviously, the president can't really promise this," explained Alan Viard, a federal budget and tax scholar at the American Enterprise Institute. The only way the taxes could be forgiven would be for Congress to approve legislation. "The question is: will there really be bipartisan agreement to forgive these taxes?"

Treasury Secretary Mnuchin urged Congress to make the payroll tax cuts permanent during testimony Tuesday, saying it was "quite clear" the president would g to Congress to get authority. "[This] is like other tax deferrals that were very helpful for people," Mnuchin said. "This is money in people’s pocket that they need now that is very important and very meaningful."

Congress has approved Social Security payroll tax holidays in the past, including a narrow cut during the Great Recession. During recent coronavirus relief talks, Democrats were emphatically opposed to Trump's proposed payroll tax cuts, raising doubts that they would forgive the debts incurred through the executive order.

"If employees are facing higher withholdings in the first four months of the year, and it seems clear that federal employees will be, there will be pressure, I think, to provide some kind of relief," Viard said, adding that the outcome is anything but certain.

The election is just two months away and it seems more likely that a new Congress, and perhaps a new administration, would be taking up the issue in January.

Trump's promise to extend the tax cut beyond the end of next year and "terminate" the Social Security payroll tax if he won reelection raised red flags. It was widely interpreted to mean he wanted to do away with the payroll tax permanently and entirely. Under this scenario, one of the main sources of income for the Social Security trust fund would be cut off.

If the government stopped collecting payroll taxes, the Social Security retirement trust fund would be depleted by 2023 and the disability fund would be gone by the middle of next year, according to the Social Security Administration.

A temporary Social Security payroll tax holiday would have a much less drastic impact. If Congress agreed to forgive the tax deferral, Trump's four-month tax cut would like cost around $100 billion, according to an estimate by the Committee for a Responsible Federal Budget.