Tax accountants and attorneys started getting phone calls first thing Monday morning, all with the same question: how President Donald Trump’s executive order allowing temporary deferment of employee payroll taxes would affect them.
Already, “there was considerable turmoil and uncertainty in the payroll world in the last four months. And now, from a time and energy standpoint of administrating, this is more onerous” in terms of compliance, said Adam Goehring, a partner at the accounting and consulting firm Baker Tilly of the deferment. “Employers have questions.”
So do employees. If their employers allow the deferment and they accept it, how will they account for that tax liability next year?
Taxes, amounting to 6.2% of pay, are taken out of workers’ paychecks and paid to the government by employers to fund Social Security.
In a nutshell, the deferment acts like a zero-interest loan for those who make less than $104,000 — one that could add up to $40 billion a month to workers’ paychecks during the last four months of the year, JPMorgan Chase said in a research note.
But it is not a tax holiday, Goehring stressed.
Workers will need to pay those taxes next year, and the deferment will at the least mean complex changes to employers’ payroll systems. It also might be expensive to enact.
The president had been pushing for a payroll tax cut in negotiations with Congress over coronavirus aid. After those negotiations fell apart, he enacted executive orders Saturday for the payroll tax deferment and for the government to pay out $400 a week to displaced workers (75% from federal-aid money, 25% from states).
Right now, it’s up to companies to decide whether to follow the directive on the tax deferment.
Companies are unsure what they will do. Spokespeople for Target and Xcel said the companies are studying what the executive order means for them.
Accountants and tax attorneys said they expect the Treasury to issue details soon to help guide employees and employers and to provide enough time for companies to change their computerized payroll services.
Mary Streitz, a tax attorney and partner at Dorsey & Whitney, said some employers may decide to forgo the president’s program and continue withholding payroll taxes from each employee’s paycheck.
“There is a lot of discussion that that is the best option,” she said. “Employers are in a bind.”
Unless Congress intervenes, employers by law are responsible for the payroll taxes. “Right now, there isn’t a mechanism for the employee to pay directly to the U.S. Treasury,” Streitz said.
If workers fail to pay the money back, it could put employers “between a rock and a hard place,” she said. “I assume the Treasury will tell the employer to collect it from the employees later. But even that will create heartburn for the employees later.”
How much later is another question not answered yet, Goehring said.
Businesses “want to know how much time and energy will their payroll tax departments have to spend to implement this?” Goehring said. “They are already [slapping their foreheads] with all the tax credits and the employer payroll tax deferral implemented since the pandemic began.”
Several different tax credits, plus emergency paid-leave changes, have complicated financial books already, he said.
Law firms across the Twin Cities said they are waiting to get additional information from the Treasury before launching educational campaigns about Trump’s latest rule change. Some firms will use webinars or e-mail alerts to help employers know that the September implementation date is coming.
Trump said if he is re-elected, the deferral would be forgiven. But that is not the law at this time, and companies must plan for now, Streitz said.
If it did become permanent, accountants said companies always could cut checks to employees for the withheld pay.
“It’s a little bit of a risk that Congress may not act, and if you’re deferring a significant amount of taxes, the reality is, a few months later, you’re going to have to come up with that cash and pay those taxes,” Pete Isberg — vice president of government relations for ADP, a payroll specialist that serves more than 800,000 businesses — told the New York Times.
The rollout itself may be expensive and time-consuming for businesses. The payroll tax rate does not usually change in the middle of the year, Isberg said, and the shift would require businesses to reprogram computer systems that can be balky.
“Things of this magnitude normally take six months or so for orderly programming,” Isberg said. “So there will be some employers that just never get this done just from a technical perspective if they have systems that are old or difficult to maintain.”
John Erhart, chairman of Fredrikson & Byron’s tax and business planning department in Minneapolis, said it’s best for workers to keep the reality right now in mind, not what might happen with acts of Congress.
“Everyone should really understand that right now, this is a deferral, not a permanent forgiveness,” he said. “Some employees will say, ‘I just don’t want to bother with that.’ But the question is what are the consequences of not doing that. There are a lot of unanswered questions.”
Includes reporting by the New York Times and Star Tribune staff writers Nicole Norfleet and Mike Hughlett.