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Executive Order on Payroll Tax Deferral

President Trump recently issued an executive order instructing the Treasury Department to defer specific employee payroll tax payments. This would apply to payments dating from September through year-end. However, the order raises many critical unanswered questions about how this would work, and whether the President has the authority to enforce it.

Technically, Trump is delaying the payment of the 12.4% Social Security tax. The government evenly splits this levy between employers and employees with automatically withheld payroll tax from their pay.

This delay is not that different from the postponing of this year’s deadline for filing taxes because of the COVID-19 outbreak. Eventually, companies will need to pay back the money. However, there is no mention of when that would be in the order. The president is betting that Congress will prevent this from happening and step in to forgive this tax.

So, what should you know about this payroll tax executive order?

Will My Pay Check Get Bigger?

The government has limited the tax break to those who earn less than $104,000 annually.

For some businesses, the initiative could be challenging to implement. This break is for workers who make less than $4,000 before taxation in each biweekly pay period. For some employees, this could be challenging. Some receive lump sums of their pay in the shape of annual or monthly bonuses. It is not clear how the plan would manage this.

What Happens If Congress Chooses Not to Forgive the Taxes?

This order will also present some financial risks to employers. The president has assumed Congress will ultimately forgive the taxes. However, Congress could simply choose to not forgive the taxes. Typically, businesses take responsibility for the payment of all payroll taxes to the IRS. This includes its employees’ shares. What happens when a company has deferred employee payroll taxes for an employee who chooses to quit in December? Who pays the amount of taxes owed? What happens should Congress decide not to forgive these taxes? Must businesses then impose significant tax withholding increases the next pay period to pay those deferred bills? Will employees be able to afford that?

Companies may also face dissatisfied workers or even lawsuits if employees cannot take advantage of this initiative. After all, a 6% increase in pay would be useful for many employees, but many companies will most likely wait until the Treasury clarifies how this plan will work before determining how they will proceed.

What Differences Will the Economy Experience from This Payroll Processing?

Many voters are very skeptical about whether the plan will result in lifted growth before the November elections. It will take time to set up payroll tax processing. Even then, many employers will probably not participate, limiting the effect of the policy.

In addition, some businesses may choose to withhold taxes from their workers’ checks to mitigate their risks. They may keep those taxes in escrow until they know if Congress will forgive the owed taxes. Should Congress dismiss the tax bills, businesses may choose to pay the deferred tax to their employees as lump sums. This defeats the goal of getting this money into the nation’s economy before November.

Who Will See Their Payroll Tax Forgiven?

Would only those working for businesses that participate in the tax deferral see their payroll taxes forgiven? This would surely be unfair to those working for organizations that chose not to participate. It would also be unfair to self-employed individuals. However, forgiving payroll taxes for all, whatever their circumstances, is expensive.

Is There An Upside?

Even though the president’s executive order has plenty of critics, if it kick-starts negotiations with the Democrats over an additional package for coronavirus relief, it could prove them wrong. Lawmakers are not anywhere near agreeing about what they should do to combat the impact of the pandemic. Trump’s move gives him the chance to campaign on middle-class tax cuts. This is something the Democrats would prefer to deny him. This could encourage lawmakers to try once again to agree on their package for coronavirus relief.

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