The Payroll Tax Deferral Executive Order, which was signed by President Trump last month, promised to deliver a financial boost for the millions of Americans struggling through tough times. Unfortunately, under current law, the tax deferment plan will likely amount to nothing more than aggravation, added stress, and a large tax bill in 2021.
The reality is, Trump’s unilateral attempt to bolster the economy without Congress’s backing is a plan riddled with complications most companies do not have the time or inclination to work through. As a result, this new payroll tax deferral plan appears to be hurting millions of Americans, and in more ways than one.
IRS Guidance Doesn’t Cover All The Bases
The IRS released Notice 2020-65 to provide employers with guidance on the plan. This notice lacks clarity and offers little in the way of concrete answers to the dozens of questions surrounding the temporary tax deferral. Funny enough, the Trump administration must have anticipated a rush in questions because the notice ends by providing a hotline number: (202) 317-5436.
Unfortunately, the three-page document and provided hotline number does little to help with the fears and frustration borne by businesses responsible for implementing the temporary changes. And from the start, Treasury guidance on how to proceed in the coming months has been less than transparent.
As a result, business groups and trade organizations joined the U.S. Chamber of Commerce in writing this letter, which urges Congress and the Trump administration to act swiftly to halt millions of Americans from facing further hardship. Given the little available space on the upcoming legislative calendar due to other pressing priorities like a potential second stimulus deal and dealing with a new Supreme Court Justice nominee, Congress has limited capacity to work through the tax deferment complexities.
The three-page document also fails to outline how employers should collect and remit the tax-deferred income after January 1st. For example, would paycheck-by-paycheck suffice, or would a lump sum need to be deducted at once? And with the tax owed from January through the end of April next year, are employers on the hook if their employees pursue employment elsewhere?
Being saddled with their former employee’s tax obligations is just one reason many private companies chose to pass on the temporary tax deferral. Another concern — employers must withhold and pay the deferred taxes proportionately over a specified time or face the risk of penalties, interest, and additional fees.
Potential Hardship For Millions With A Tax Bill Due Next Year
Starting the near year broke is never a good idea, but that’s especially true while coping with a global pandemic. Unfortunately, this could easily be the harsh reality for millions of Americans. For those unable or unwilling to set aside the additional take-home pay they see in their paychecks in the coming months, a sizable tax bill will automatically be deducted by payroll through the end of April.
But the problems will likely be more prevalent among certain types of employees. For starters, the federal government is one large employer who chose to go with the plan, and millions of federal employees could be hurt as a result (which includes military members, the Department of Defense, and all Federal agencies). This has the potential to be such a large problem that the civilian federal employee union has already urged the White House to allow federal workers to opt-out of the plan.
Also, military officers are understandably worried and voiced their concerns in letters to members of Congress. They explained how many young enlisted service members lack financial education and barely survive financially in normal times. Owing more money on taxes next year can be an enormous hardship for those who don’t set aside the extra cash now.
Unfortunately, the U.S. military notified service members that the 6.2% tax deferral on employee wages and basic pay from September through December is non-negotiable. Essentially, military service members making $8,666 or less in monthly income have no choice but to accept the deferral and plan accordingly.
This means that, starting in January of next year, the deferred payments will be subtracted from paychecks through April, along with the regular withholding amount. The military has advised service members to anticipate the decrease and cautiously plan for a 12.4% drop in earnings over the first four months of 2021. For those finishing their service to the country, a lump sum equal to the taxes owed will be taken in their final paycheck.
Many Private Companies Are Not Buying Into The Plan
It’s not hard to imagine why many private companies don’t see any upside to disrupting their payroll process when nobody is actually getting a tax break in the end. After all, there’s no real incentive to put in the extra work for temporary changes that stand to benefit very few.
Further, the deferred taxes that will eventually be owed has many employers worried they will wind up on the hook for the balances of employees who switch to other jobs. Also remember that employers must withhold and pay the deferred taxes from wages paid between January 1, 2021 and April 30, 2021. If not, they face the risk of penalties, interest, and additional fees.
At the end of the day, this means that many employers won’t bother getting involved in the tax deferral scheme. For many small businesses, the whole situation creates a lot of red tape and busywork without really helping their employees. So, why bother?
The Bottom Line
Instead of bringing relief to millions of Americans already struggling to make ends meet in these tough COVID times, the payroll tax deferment plan merely kicks the can down the road. The confusion and chaos caused by this plan might also make the problems millions of Americans are already experiencing worse.
If you find yourself in a situation where you cannot avoid having your payroll taxes deferred, your best bet is setting aside the money you’ll need to settle this debt later on. If you fail to save your “extra” temporary pay, you could live to regret it come April of next year.