IRS Payroll Tax Deferral Starts Today; Will It Defund Social Security?

"It took 20 days from President Trump signing an executive memorandum to defer certain payroll tax obligations for Treasury Secretary Mnuchin to issue Notice 2020-65 and provide guidance to employers on the how to execute the payroll tax holiday. Treasury’s guidance also came just two business days before the deferral period was set to start on September 1, leaving absurdly little time for employers to potentially reconfigure payroll systems and implement the change.

To add insult to injury, the guidance itself wasn’t attractive. It clarified that the short deferral of the tax was not an elimination of the tax and would leave employers on the hook for repaying the tax in early 2021. It also articulated that the deferral would only be for a few short months, which would likely reduce employee wages in 2021 as companies double employees payroll taxes. The net result is that the odds of many employers participating is low, which should be music to the ears of those worried about Trump’s initiative defunding Social Security. Simply put, it is highly unlikely that the payroll tax deferral will impact the Social Security trust fund.

Bipartisan Resistance To Trump’s Payroll Tax Plan

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President Trump had been enamored with a payroll tax cut for months. Before Republicans unveiled the HEALS Act, he even indicated that a payroll tax cut was a red-line issue for the next bill, telling Chris Wallace during an interview that he “would consider not signing it if we don’t have a payroll tax cut." However, there was strong, bipartisan opposition to the plan with high-ranking Senate Republicans publicly voicing their concerns. “I’m not a fan of that,” said John Thune (R-South Dakota), the second-ranking senator, speaking of a payroll tax cut. Senate Finance Committee Chairman Charles E. Grassley (R-Iowa) also spoke against the provision, arguing that the extra money wouldn’t reach voters quickly. State officials hae been equally bearish. Zach Conine, the Nevada state treasurer, called the tax holiday “fiscal malfeasance disguised as a stimulus plan,” according to The New York Times. “American need real help now,” Mr. Conine added. “Delayed taxes don’t help the unemployed.”

The resistance was appropriate given that a payroll tax holiday is considered an ineffective policy tool that isn’t well suited for the current coronavirus crisis. A temporary payroll tax cut might be an effective tool when trying to stimulate consumer demand during a normal slowdown; however, the current economic malaise isn’t caused by a financial recession, but rather a health crisis and fear of coronavirus. It also does little to benefit the millions who are unemployed and, therefore, do not pay any payroll taxes. Finally, a payroll tax deferral is regressive and “gives the biggest breaks to those with the biggest paychecks, and delivers nothing to those who have lost their pay,” explained Betsey Stevenson and Justin Wolfers, professors at The University of Michigan.

The White House eventually walked back its red-line and a payroll tax deferral wasn’t included in the Senate HEALS Act proposal. However, with Congressional negotiations stalled, Trump issued four executive actions on August 8, including one directing the Treasury to defer payroll taxes. “This will mean bigger paychecks for working families,” Trump claimed during a press conference unveiling the executive actions. Trump said he would forgive the delayed payroll taxes if re-elected and make the payroll tax holiday permanent. “If I win, I may extend and terminate” the tax, he stated (Note: Trump doesn’t have the power to unilaterally forgive the delayed payroll taxes. That would require Congressional approval and action).

Companies Skeptical And Were Stuck In A Holding Pattern Awaiting Treasury’s Guidance

Companies and organizations were not overly enthusiastic about a payroll tax deferral and had many questions for Treasury after Trump announced the initiative. The American Institute of Certified Public Accountants (AICPA) sent a letter requesting guidance on myriad aspects of Trump’s memorandum, including more detail on whether employees would be able to opt-in, how income cut-offs would be calculated, what the repayment date would be, and clarification on how employees would pay the deferred taxes.

The U.S. Chamber of Commerce, along with over 30 other organizations, also sent a letter stating its opposition to the plan. “Many of our members consider it unfair to employees to make a decision that would force a big tax bill on them next year. It would also be unworkable to implement a system where employees make this decision,” the Chamber’s letter stated. “Therefore, many of our members will likely decline to implement deferral, choosing instead to continue to withhold and remit to the government the payroll taxes required by law.”

Payroll experts advised Congress and Treasury that the type of action Trump was advocating would require at least six months of programming changes. Large companies, like Walmart, Macy’s, and Procter & Gamble, said they needed more details from the IRS before deciding whether to implement the deferral. “The lack of concrete guidance on the most basic of implementation issues presents an untenable situation, making it basically impossible for employers to implement this EO and leaving little choice but for those employers to continue remitting payroll taxes to the Treasury,” said Caroline Harris, chief tax policy counsel at the Chamber of Commerce. As the AICPA letter indicated, employers were worried about many items, but perhaps one of the biggest sources was whether they would be on the hook if they stopped withholding taxes from employees’ paychecks without any guarantee that Congress would forgive the payments, which was an especially acute risk for companies with high turnover.

Treasury And IRS Finally Issue Guidance (IRS Notice 2020-65)

Two business days before the payroll tax deferral was scheduled to commence, the IRS and Treasury finally issued guidance for employers, which provided some clarification, but also left many questions unanswered. What became clear from Notice 2020-65 was that employers are indeed responsible for withholding and paying back any deferred taxes, putting them at significant risk if they cannot collect those funds from employees. It also confirmed that there is no payroll tax cut or elimination of payroll taxes. Instead, payroll taxes are simply being postponed for four months, due in early 2021 instead of between September 1, 2020 and December 31, 2020.

MORE FROM FORBESIRS And Treasury Issue Guidance On Trump's Payroll Tax DeferralBy Shahar Ziv

Moreover, the deferral is structured in a way that could necessitate employers to double payroll tax withholding on employees starting in January, 2021. The guidance only gives employers four months - between January and April 2021 - to pay back deferred payroll taxes without interest or penalties, making it increasingly unattractive for them to implement. “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. But under a simple deferral, employees would be stuck with a large tax bill in 2021,” the letter from the U.S. Chamber of Commerce stated.

In some ways, one could argue that Treasury was doing everything it could to silently sabotage the payroll tax deferral; appeasing Trump by providing guidance and putting the payback burden on employers, but doing it so late in the game and making it so unattractive that the likelihood of many employers opting to implement the deferral would be low.

Treasury Delays Means Payroll Tax Deferral Unlikely To Defund Social Security

After Trump initially announced his payroll deferral memorandum, many sounded the alarms about the end of Social Security, mainly due to Trump’s equivocal remarks about terminating it. The reality is far more subdued and likely means that there will be little or no impact to Social Security funding. Yes, payroll taxes are the primary source of revenue for Social Security; however, for a payroll tax action to materially affect Social Security, it would need to be done at scale, be an elimination of the tax as opposed to a mere deferral of the obligation, and not be coupled with a corresponding action to reimburse the Social Security Trust Fund from other government revenue. None of those conditions appears likely to hold.

Expect Low Opt-In Rates By Employers

With so little time between Treasury’s guidance and the start of the payroll tax deferral period, so many unanswered questions, and so much additional risk, most employers are thinking twice about opting into the program. “Every employer I’ve talked to has said we are not going to do this. It is not good for administrative complexity, and worse, it’s an employee relations disaster, remarked Bill Arnone, the CEO of the National Academy of Social Insurance. I have yet to see any private employer announce that they will implement the payroll tax deferral, although some may crop up in the next few days.

Only One Entity Has Publicly Opted-In

So far, only one entity - the federal government - has publicly stated that it will defer payroll taxes for its employees; not so coincidentally, it has Trump as its ultimate boss. Initially, the National Finance Center (NFC), a federal government agency division under the United States Department of Agriculture, said in an August 21 memo it will begin deferring Social Security taxes for all employees who are eligible. The NFC processes payments for 600,000 federal employees across 160 agencies. While it does not appear like the NFC will allow employees to opt-out, the total individuals impacted will be lower, given that only those earning less than $4,000 bi-weekly are eligible for the deferral.

Yesterday, sources confirmed that the other three payroll processors used by federal agencies - operated by Defense and Interior Departments and the General Services Administration - would also defer taxes. “ About 60 percent of the 2.1 million executive-branch employees earn less than $100,000 a year, just below the cutoff set by Trump’s order,” according to The Washington Post. The result is that about 1.3 million federal workers will be forced to have their payroll taxes deferred to early 2021.

“The Trump administration’s plan to initiate payroll tax deferrals for civil servants treats the federal workforce as a guinea pig for a bad policy that businesses already rejected as ‘unworkable,’” said Representative Don Beyer (D-Virginia), who represents the largest number of federal employees of any U.S. representative. “This payroll tax deferral does not really put money in workers’ pockets, it simply sets up the members of the federal workforce who can least afford it for a big tax bill that many will not expect,” he added.

Even the federal processors will not be able to implement changes in time for an early September deferral. The NFC, for example, backed off its original intent to execute the payroll tax holiday on the first pay period in September, which would be around September 8. Instead, it is aiming to start the deferral on the second September pay period, which would be between September 18 and 24 for most federal employees. “The federal government will implement an across-the-board payroll tax deferral by all federal payroll providers, so all federal employees who meet the income threshold will see savings,” a senior administration official told Federal News Network. “We want all payroll providers to implement the deferral on the same schedule, so the deferral should be implemented starting with the second paycheck in September.”

It is true that the Social Security trust fund will lose some interest income by receiving tax revenue several months later; however, “the loss would be tiny even if all employers opted to defer,” according to Alan Viard, a resident scholar at the right-leaning American Enterprise Institute.

Fact Check: Only Congress Can Implement A Payroll Tax Cut

Trump’s memorandum directed the Treasury department to “explore avenues, including legislation” to forgive the payroll taxes that are being deferred. The reality is quite simple. Trump “does have the authority to postpone the collection of the payroll tax under the Internal Revenue Code, but it’s only the authority to postpone and not forgive.” said Michael Graetz, a professor of tax law at Columbia University and author of The Wolf at the Door: The Menace of Economic Insecurity and How to Fight It. “He doesn’t have the authority to forgive the taxes,” added Graetz. “Only Congress can do that.”

Congress already threw cold water at including a payroll tax cut in the latest coronavirus stimulus proposals; neither the HEROES Act passed by the House of Representatives nor the HEALS Act proposed by the Senate included it. Moreover, Social Security is such a lightning rod issue that members of Congress do not want to touch it. It represents one of the most important financial lifelines in the United States with an estimated 179 million workers were covered under Social Security in 2019, according to the Social Security Administration. Moreover, 21 percent of married couples and 45 percent of unmarried persons rely on Social Security for 90 percent or more of their income and 40 percent rely solely on Social Security for retirement income. A Congress that can’t agree on a stimulus bill during a pandemic is not going to vote on or for an unpopular payroll tax cut.

Funding Cut Versus Reimbursement

Finally, even if Congress did approve a cut, it would not automatically amount to a defunding of Social Security. The key issue will come down to whether the Social Security trust gets replenished from other sources. For example, when Obama and Republicans struck a compromise and instituted a temporary payroll tax cut, it did not affect the long-term health of Social Security because revenue that would have normally funded the Social Security Trust Fund was reimbursed out of general government revenue. This kept the trust from losing assets. If Congress and whomever is president in 2020 do vote to forgive the payroll taxes that were deferred, but follow Obama’s model, then the Social Security trust fund would not be affected; only if a reimbursement clause is not included would a cut potentially impair funding for Social Security.

The Upshot

Don’t expect the bluster of Trump’s payroll tax deferral announcement to translate to much real-world impact. Late, convoluted guidance from Treasury increases risk for employers and gives them precious little time to implement changes. Coupled with the fact that Trump’s memo simple defers payroll taxes and doesn’t forgive them, the likelihood is that there will be low employer uptake. That will give Congress, already bearish on payroll tax cuts, even less incentive to consider legislation to forgive the deferred taxes. In other words, the likelihood of the payroll tax holiday defunding Social Security is quite low."

IRS Payroll Tax Deferral Starts Today; Will It Defund Social Security?