The Payroll Tax Delay Is Here, But So Is Confusion About It
With the start of a new month, some workers may get a boost in their take-home pay. The Trump administration has given employers the option to stop collecting payroll taxes for most workers through the end of this year.
President Trump announced the move three weeks ago, after failing to reach a deal with Congress on a more comprehensive pandemic relief package.
"This will mean bigger paychecks for working families as we race to produce a vaccine," Trump said.
The move applies to workers whose biweekly pay is $4,000 or less.
But as new guidance from the IRS makes clear, the windfall is merely a temporary loan. Unless Congress decides to forgive the taxes, employees will have to repay the money early next year.
"I don't want to be the one handing out the paychecks in 2021 when people find that not only do they have to pay Social Security again, but they have to pay it twice, for all the things they didn't pay in the last part of 2020," said Rep. Don Beyer, D-Va.
Trump wants Congress to simply waive the payroll tax. And he's said that if he's reelected, he'll propose permanent cuts.
"If I'm victorious on Nov. 3, I plan to forgive these taxes and make permanent cuts to the payroll tax," Trump said. "I'm going to make them all permanent."
Only Congress can do that. Lawmakers did waive part of the payroll tax temporarily during the Obama administration. But critics warn that Trump's proposal would leave a big hole in Social Security, which the 6.2% tax helps pay for.
"We need to shore up Social Security, and the last thing we want to do is undercut it," said Beyer, who is vice chairman of the Joint Economic Committee in Congress.
Businesses also worry about what happens if an employee pockets the extra money this fall, then quits or gets fired before the tax is repaid. The worker's employer could find itself on the hook for the taxes.
Many employers may be reluctant to put themselves or their workers in that position, says Pete Isberg, vice president of the payroll processing firm ADP.
"Given what it is, you're going to have a lot of employees who respond and say, 'Wait a minute. I kind of don't like this idea. Would you please not do it for me,' " Isberg said.
The last-minute timing of the IRS guidance didn't help employers trying to meet the Sept. 1 effective date of the president's action.
"After 5 p.m. on Friday the 28th gave us exactly one business day to respond to it," Isberg said.
The U.S. Chamber of Commerce and dozens of trade groups have called the president's plan "unfair" and "unworkable," and say many of their members will simply keep collecting payroll taxes as they always have.
The federal government, however, will stop withholding the tax from the paychecks of hundreds of thousands of federal workers.
Those workers might want to be careful about what they do with the extra money.
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