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President Donald Trump’s payroll tax deferral plan could result in higher tax bills for workers in 2021, tax experts said.
As lawmakers remained at a stalemate over coronavirus relief efforts last week, Trump signed a package of four executive orders on Aug. 8.
In one of them, the president called for the deferral of the employees’ portion of payroll taxes from Sept. 1 through the end of the year. Other measures included an extension of unemployment benefits — albeit at a reduced level — as well as a three-month extension of payment relief for federal student borrowers.
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Why you might not see cash from a payroll tax cut
Normally, employers and employees split the burden of the payroll tax, each covering a 6.2% levy that funds Social Security and a 1.45% tax that supports Medicare.
Social Security taxes are subject to an annually adjusted wage cap ($137,700 for 2020), but Medicare taxes continue to apply beyond that threshold.
Forgiveness of the deferred employee’s portion of the tax remains uncertain, as this would be up to Congress.
However, Trump said in his executive order that “the Secretary of the Treasury shall explore avenues, including legislation, to eliminate the obligation to pay the taxes deferred pursuant to the implementation of this memorandum.”
The order also puts the Treasury Department in charge of releasing guidance, but accountants and payroll providers worry that a flurry of unforeseen tax consequences could await employees and their firms next year.
“The worst-case scenario is we have a deferral and if Congress doesn’t act on forgiveness, each employee owes the tax and pays it on their Form 1040 [the federal income tax return] in April,” said Pete Isberg, vice president for government relations at payroll provider ADP.
“I’m sure the executive order is intended to prompt congressional action,” he said. “It puts pressure on Congress to follow through with corresponding legislation or the employees will owe the tax at the end of the year.”
A shared burden
Generally, employers are responsible for withholding and depositing payroll taxes.
This year, the CARES Act gave companies some relief by allowing them to defer their share of this year’s payroll taxes: 50% will be due in 2021 and the remainder must be paid in 2022.
When it comes to employees’ share of payroll taxes, if the employer doesn’t withhold these levies and the IRS can’t collect them, the worker is on the hook for the tax.
Tax experts have warned that employers might get cold feet over a mere deferral of employees’ payroll taxes.
If they get the savings passed along in the form of higher wages, what does this mean for paying it back and when will it be paid back?
Garrett Watson
senior policy analyst at the Tax Foundation
For instance, if a company passes the savings onto the employee and the tax is only deferred, the IRS will want its money later.
Further, employees might enjoy a few more bucks in their paycheck for now, but without forgiveness, they could be on the hook for those taxes next year.
Here’s how that might look, according to Isberg of ADP:
• An employee making $50,000 per year would earn about $1,923 per biweekly pay period. A deferral of Social Security taxes would allow that worker to pocket approximately $119 for each paycheck — or $1,073 over nine pay periods.
• Without corresponding tax forgiveness, this worker will owe that sum — $1,073 — on their Form 1040, Isberg found.
“If they get the savings passed along in the form of higher wages, what does this mean for paying it back and when will it be paid back?” asked Garrett Watson, senior policy analyst at the Tax Foundation. “Could this be on Jan. 1, or could this be folded into the tax return in April?”
Separately, the CARES Act gave employers the option of deferring their share of payroll taxes this year. They’ll be responsible for 50% of the liability in 2021 and the remainder in 2022.
Employers at a standstill
Tax professionals are recommending that employers slow down and await directions from the Treasury.
Employees might even ratchet up the pressure on their firms, seeking that payroll tax break.
“I’m telling employers not to worry about this right now; we have three weeks for it to play out,” said Adam Markowitz, enrolled agent at Howard L Markowitz PA CPA in Leesburg, Florida.
“The bigger the company, the bigger the burden and the more people you’ll have to make this decision with.”