Five things to know about Trump’s payroll tax deferral

One of the Trump administration’s latest efforts to help workers amid the coronavirus pandemic is off to a rocky start.

President Trump signed a memo last month directing the Treasury Department to allow employers to defer payroll taxes from Sept. 1 through Dec. 31 for employees making less than $4,000 on a biweekly basis.

White House economic adviser Larry Kudlow told reporters Friday he thinks the deferral will be “extremely helpful,” and the administration is pushing for the deferred taxes to be forgiven.

But few businesses are expected to participate in the deferral, in part because of the administrative burdens but also because it could result in their employees receiving less in take-home pay in the first few months of 2021.

There’s also no guarantee Congress will pass legislation to forgive the deferred taxes.

Here are five things to know about President Trump’s payroll tax deferral.

Smaller paychecks likely in 2021 for those who participate

Under the IRS guidance, employers are allowed to stop withholding the 6.2 percent employee-side Social Security tax from paychecks through the end of the year.

However, employers who participate will then need to recoup that money by increasing the amount of taxes withheld from employees’ paychecks from January through April.

The result is that workers whose taxes are deferred would see bigger paychecks this year and smaller than typical ones next year, unless legislation is enacted to forgive the deferred taxes.

Implementation still clouded in uncertainty

The IRS guidance is only three pages long and did not answer all of the questions that business and tax professionals have about implementation.

A key question that wasn’t answered was how employers should collect deferred payroll taxes from employees who depart before the end of April. The IRS says that if necessary, employers can make arrangements to collect the taxes from employees, but it does not provide further detail.

Businesses also have questions about how deferring payroll taxes would interact with state laws and collective-bargaining agreements.

Many businesses are unlikely to participate

Business groups expect many of their members to continue withholding Social Security payroll taxes from paychecks, because there’s no guarantee the deferred taxes will be forgiven and they don’t want to be in a position where their employees are seeing less in take-home pay for the first four months of 2021.

The U.S. Chamber of Commerce and other groups representing private-sector employers argue that the only good way to provide payroll tax relief is for the White House and Congress to come together on legislation.

Businesses that have an interest in participating may not be able to do so immediately since it may take some time to update their payroll systems.

Robert Delgado, principal-in-charge of the compensation and benefits group in the Washington national tax practice of KPMG, said businesses might have to manually track some information to appropriately defer the taxes.

“I think it’s a significant disincentive to businesses with all the uncertainties, the unknowns and the complications, as well as the expense of having to potentially manually process this,” he said.

Federal workers are expected to see their taxes deferred

The most prominent employer to announce participation in the payroll tax deferral program is the federal government. The Office of Management and Budget said the government will defer employee taxes in order to provide immediate relief during the pandemic.

Unions that represent federal employees are upset that the deferral appears to be mandatory for eligible government workers, and are urging the Trump administration to allow employees to have a choice. Unions and Democratic lawmakers also want more information about plans for collecting the deferred taxes.

Democrats have expressed concerns that the administration is treating federal workers as “guinea pigs,” noting that private-sector businesses are wary of participating in the deferral.

Trump wants to forgive the deferred taxes, Democrats want to block the deferral

Before signing the deferral memo in August, Trump spent months pushing for coronavirus relief legislation to include a payroll tax holiday, but the idea faced resistance from both Democrats and Republicans. The president is hoping to turn his deferral into a payroll tax cut, pledging to forgive the postponed taxes if reelected.

Eliminating the deferred taxes, however, would require congressional action. Rep. Kevin Brady of Texas, the top Republican on the House Ways and Means Committee, told reporters Wednesday that he intends to introduce legislation to accomplish Trump’s goal.

But there’s no guarantee that forgiveness becomes law. Democrats and Republicans have yet to reach an agreement on another coronavirus relief package after months of on-and-off negotiations.

Marc Gerson, head of the government affairs practice at Miller & Chevalier, said the amount of pressure on Congress to forgive the deferred taxes will depend on the number of people who are poised to see less in take-home pay early next year. He also said the pressure will increase as the collection period for the taxes approaches.

“The real political pressure point is the magnitude of employees facing reduced paychecks in the New Year,” Gerson said.

Democrats want to overturn IRS guidance on the deferral.

Senate Minority Leader Charles Schumer (D-N.Y.) and Sen. Ron Wyden of Oregon, the top Democrat on the Senate Finance Committee, asked the Government Accountability Office (GAO) this week for a determination about whether the IRS notice is a “rule” for purposes of the Congressional Review Act. If the guidance is considered a rule, Senate Democrats could offer a resolution to disapprove of it and force a vote on the Senate floor.

Rep. John Larson (D-Conn.), the chairman of the House Ways and Means Committee’s Subcommittee on Social Security, on Friday introduced a bill to nullify the IRS guidance. He also introduced a resolution to overturn the guidance. A spokesperson for Larson said Friday that lawmakers haven’t yet heard from GAO.

Even if Congress were to send a resolution to Trump’s desk, they would need a veto-proof majority since the president would almost certainly use veto the measure.