If you're counting on a slightly bigger paycheck as 2020 winds down due to Donald J. Trump's presidential payroll tax pronouncement, don't hold your breath.
Trump's Aug. 8 executive memo called for the deferral of the 6.2 percent employee portion of the Federal Insurance Contributions Act (FICA) tax that goes toward Social Security. The White House said it would be an easy way to provide relief for Americans during the COVID-19 crisis.
Others, however, weren't so sure about the proposal, especially the easy claim.
Almost immediately after the executive memo was released, questions were raised by potentially affected employees, the companies where they work, those who would administer this temporary tax change and, of course, the tax community.
The wisdom of such a move was debated by tax policy wonks. Businesses chimed, notably the U.S. Chamber of Commerce, on the effects on employers. And everyone, including the Association of International Certified Professional Accountants (AICPA), wanted more information.
They finally got the added info. Sorta.
Treasury announcement wanting: Late Friday, Aug. 28, afternoon, the U.S. Treasury issued Notice 2020-65. But like the original presidential memo, it is at best a big bunch of nothing.
It's a game of "chicken" with Congress on this one--if you don't forgive it, then there's going to be this January pay cut to explain. Because nobody on the Hill seemed at all interested in the payroll tax holiday, so this was a way to try and force them to play along...— Ed Zollars, CPA (@edzollars) August 29, 2020
The consensus, at least on #TaxTwitter, is that Treasury's guidance is, at best, a big bunch of nothing.
And at its worst, it could be setting up a whole lot of problems for workers, their employers and the country's most popular federal benefit program.
Employer potential problems: First, Trump's proposal as spelled out in Treasury announcement could (likely will) leave employees who get a minimal short-term "raise" that compounds current COVID-19 financial troubles in the near future.
Sure, not having to have to pay (i.e., have withheld) the 6.2 percent Social Security segment of FICA for the next few months will put a few (very few, in some cases) dollars into paychecks.
But that tax relief is not permanent. It's essentially a short-term government loan.
And while there isn't any interest added, the amount that would have come from their paychecks must be paid back to Uncle Sam, specifically to the Social Security trust fund.
Under the Treasury instructions, that payback would come early next year.
Oh yay, NOT. That timing really sucks.
Say you were able, despite the pandemic's financial and physical limitations, to do at least a little holiday shopping. Then just as the credit card bills for those purchases arrive next January, you start getting smaller paychecks because the regular 6.2 percent Social Security tax starts coming out of your pay again. Plus, you lose even more as the deferred — yes, deferred, not forgiven — withholdings from the last few pay periods of 2019 are now recouped.
Thanks, but no thanks!
Business issues, too: Businesses that opt — and yes, it's a choice, not a requirement — not to collect payroll taxes from their workers also could encounter some unfortunate consequences.
The biggest one is that the companies could end up holding the bag for the eventual repayment of their employees deferred tax amounts.
This could happen if workers voluntarily leave their jobs or, more likely, are laid off before they get checks with the make-up tax amounts withheld.
That's just one reason many businesses are saying they will keep withholding their employees' portion of this tax.
And that, going back to my initial dubiousness at the beginning of this post about the White House plan, means no so-called payroll tax raise for these workers.
Undercutting retirement benefits: Finally, this short-term payroll tax deferral scheme could be the start of larger Social Security problems.
The government's national retirement benefits program could end up in dire straits if, as Trump has said, he's successful in a second term in doing away with the payroll tax.
No wonder Treasury waited until the Republican National Convention ended and then buried its sort-of payroll tax deferral guidance on a Friday afternoon.
Elaborating on Treasury's notice: OK, so just what is Treasury's take on Trump's Social Security payroll tax decree?
In the spirit of Saturday Shout Out, I'm letting other folks elaborate on the official notice and its potential implications. Three pieces earn this weekend's over-to-you honors.
First up is Alistair Nevius' explanation of the payroll tax deferral notice for the AICPA's Journal of Accountancy.
Next is Tony Tomm's piece for The Washington Post that focuses on the smaller 2021 worker paycheck problem under the plans laid out by Treasury.
Finally, the larger look at how this could be the start of wider Social Security problems is covered by Zack Friedman, founder and CEO of the online personal finance company Make Lemonade, in his Forbes' article "Social Security Benefits Could Be Permanently Depleted By 2023 If Payroll Taxes End."
Yeah, not the cheeriest or lightest of weekend reading, but an issue — actually issues — that we can't ignore.
You also might find these items of interest:
- Most people pay more payroll than income taxes
- Social Security payroll tax cap change could boost struggling benefits program
- What a COVID-related payroll tax cut could mean to you now and your retirement later
|Coronavirus Caveat & More Information
In 2020, we're all dealing with extraordinary circumstances,
both in our daily lives and when it comes to our taxes.
The COVID-19 pandemic and efforts to reduce its transmission
and protect ourselves and our families means that,
for the most part, we're focusing on just getting through these trying days.
But life as we knew it before the coronavirus will return,
along with our mundane tax matters.
Here's hoping that happens soon!
In the meantime, you can find more on the virus and its effects on our taxes
by clicking Coronavirus (COVID-19) and Taxes.