Trump payroll tax deferral finds few takers among businesses

September kicks off the payroll tax deferral period initiated by President Trump last month, but few businesses are expected to participate in a plan that would likely lead to less take-home pay for workers early next year.

Under guidance issued by the IRS last week, employers can stop withholding Social Security payroll taxes from paychecks from Sept. 1 through Dec. 31 for employees who make less than $4,000 on a biweekly basis. The money would then be collected by having businesses increase the amount of taxes withheld from paychecks in the first four months of 2021.

“This is like other tax deferrals that we gave which were very helpful to people,” Treasury Secretary Steven Mnuchin said during a hearing Tuesday held by the House Select Subcommittee on the Coronavirus Crisis. “This is money in people’s pocket that they need now that is very important and very meaningful.”

But stakeholders said that in addition to the headache of rushing to update payroll systems, participating in the program would also put their employees in a situation where they’d see smaller than usual paychecks next year.

“It seems risky for employers, so I think they will shy away from it,” said Amie Kuntz, an Iowa-based CPA at RubinBrown LLP.

Trump signed an order last month directing the Treasury Department to defer payroll taxes in an effort to provide financial relief to Americans as negotiations stalled on Capitol Hill over another COVID-19 rescue package.

Trump and his allies view the order as a way to approach a payroll tax holiday — a priority that was met with criticism from lawmakers on both sides of the aisle. The president has said that if he is reelected, he will forgive the taxes that are deferred over the next four months, though Congress would have to take action for that to happen.

During Tuesday’s hearing, Mnuchin reiterated that Trump plans to ask for authority from Congress to forgive the deferred taxes. He said that any legislation Congress passes to forgive the deferred payroll taxes would include a transfer from the general fund to make the Social Security trust fund whole again.

The order and related IRS guidance has been viewed favorably by key GOP lawmakers.

“The Treasury Department’s guidance provides employers that decide to participate with flexibility to implement the payroll tax deferral,” a spokesperson for Senate Finance Committee Chairman Chuck Grassley (R-Iowa) said in a statement. “The Administration is doing everything in its power to help employees and the unemployed. Congressional action, so far blocked by Democrats, will ultimately be required to provide broad-based relief for workers and families to help the economy fully recover.”

But Democratic lawmakers have criticized it because workers will still be responsible for the deferred taxes.

“This is another one of these sort-of not very well thought out executive orders,” Rep. Bill Foster (D-Ill.) said during Tuesday’s hearing.

The three-page notice the IRS issued Friday answered some of businesses’ questions about Trump’s order but left others unanswered — particularly about what happens when an employee leaves a company before the end of the repayment period.

Business groups said their members are still reviewing the guidance, but they remain hesitant about taking action that could result in employees seeing significantly less take-home pay next year. They said many companies are expected to opt against deferring taxes and instead will continue to withhold the 6.2 percent in Social Security payroll taxes from their workers’ paychecks.

“You’re still left with that fundamental question that an employer is leaving an employee with a significant tax bill that has to be collected in January,” said Neil Bradley, executive vice president and chief policy officer at the U.S. Chamber of Commerce.

Sean Kennedy, executive vice president for public affairs at the National Restaurant Association, said, “We’re still reviewing it, but it requires a restaurant owner to take a leap of faith that Congress will come together this year and make this deferment permanent.”

Industry groups said the best way for policymakers to provide payroll tax relief for workers is for Congress to pass legislation.

“What this really points back to is there’s really no good way to do this other than Congress and the president coming together and enacting a change into law,” Bradley said.

David French, senior vice president of government relations for the National Retail Federation, said his group has informally surveyed its members and found that most who responded do not plan to implement the deferral at this time, but that may change if Congress adopts legislation to forgive the deferred taxes.

“The big question is what Congress does in response to this,” he said.

Employers who do want to defer their employees’ payroll taxes may face some challenges in doing so. For example, they will need to update their payroll systems, which could take some time and result in a shortened deferral period.

Pete Isberg, vice president of government affairs for the payroll services company ADP, said that how quickly businesses would be able to update their payroll systems will vary. He said ADP is expected to be ready to implement payroll tax deferrals in early September, but companies that maintain their own payroll systems might not be ready until October or November.

“The programming changes are pretty substantial,” he said.

Alice Jacobsohn, director of government relations at the American Payroll Association, said payroll systems can’t just eliminate the deduction of Social Security payroll taxes from their employees’ paychecks, they also have to keep track of how much is owed in taxes because the deferred amounts have to be repaid in 2021.

“That is not that simple because the systems are not designed to do that,” she said.

While many businesses are not expected to defer their employees’ payroll taxes, the federal government is expected to implement the deferral for its workers.

“The President put forward this action to give relief to all Americans during this pandemic — as an employer, the Executive Branch is implementing the deferral to give our employees relief as quickly as possible, in line with the Presidential memo,” Office of Management and Budget spokeswoman Rachel Semmel said in a statement.

Democratic lawmakers and labor unions that represent federal employees are blasting Trump’s payroll tax deferral and the decision to institute it for federal workers.

“The Trump Administration’s plan to initiate payroll tax deferrals for civil servants treats the federal workforce as a guinea pig for a bad policy that businesses already rejected as ‘unworkable,’ ” Rep. Don Beyer (D), whose Northern Virginia constituents include a large number of federal employees, said in a statement Friday.

The American Federation of Government Employees, the largest union of federal workers, warned that implementation of the tax deferral will inflict financial pain in the new year.

“President Trump’s payroll tax scheme is a scam that leaves workers with a substantial tax bill right after the holiday season,” Everett Kelley, the group’s national president, said in a statement Monday.

“Instead of this dangerous scheme, President Trump ought to encourage the Senate to come to the table and approve legislation passed by the House over 100 days ago that would provide working Americans with direct cash payments and other meaningful relief for those hardest hit by the coronavirus pandemic,” he added.

Updated on Sept. 2 at 9:05 a.m.