President Donald Trump has authorized a temporary break on some federal taxes deducted from paychecks, but the plan to boost workers’ pay during the pandemic is gaining little traction in Maryland and elsewhere.
Under a Trump executive order, workers who earn less than $104,000 qualify for the payroll tax deferral through Dec. 31. In theory, that puts money back in workers’ pockets to help stimulate the economy and offer relief from the economic crisis caused by the coronavirus. But workers would need to repay the deferred taxes by the end of April.
However, the plan, which took effect Sept. 1, is optional for employers, and few employers appear to be jumping in. Others still are evaluating whether to temporarily stop withholding the 6.2% Social Security tax on payroll.
FedEx has said it won’t participate and instead will continue collecting the taxes. Baltimore-based T. Rowe Price Group said the firm is evaluating its options. Other companies contacted declined to discuss their plans.
FedEx cited “a number of unanswered questions for businesses and their payroll providers” as a reason to decline, saying it will continue withholding and remitting employees' share of Social Security taxes at least until more complete guidance comes from the Internal Revenue Service.
IRS guidance issued Aug. 28 said employers ultimately would be responsible for collecting and paying back the money next year. Uncertainty over what that could mean for employers could explain the lack of interest, some advisers said.
“I haven’t heard of anybody who has elected to do it,” said Josh Pincus, managing partner of Laurel-based Malden Solutions, an employee benefits firm with a payroll services division. “We’re not strongly encouraging people to do it.”
It’s unclear, for instance, how employers would collect deferred taxes from employees who end up leaving a job after the tax holiday ends.
“We’ve gotten a lot of folks asking what this means and we are trying to give them some kind of guidance,” Pincus said. But “there is no way for us to advise a client if they will inadvertently owe that employee’s taxes.”
Few clients of RS&F, a Towson-based consulting and accounting firm, have asked for advice about the deferral, said Jeff Rosen, a co-managing partner.
But for those who do, “we are expressing to them caution about deploying this tool to their employees because it could ultimately be an obligation of theirs, and they would have to take that risk,” Rosen said. “Employers are not going to be so quick to jump into this.”
Employers that do choose to participate could do so easily through updates in payroll software, experts said.
ADP, the nation’s largest payroll services firm, just last week completed systems that would allow clients to participate and get feedback from employees.
“It’s too early to say what the uptake is,” said Pete Isberg, vice president of government affairs for ADP, which says it handles payroll for one of every six U.S. workers. “We can foresee employers having different opinions, some not wanting to do it because it is just a deferral. ... [But] we thought most employers would want to give employees the option.”
Clients have asked whether the deferral is required and how the repayment would work next year, Isberg said.
He believes that employers who choose to defer taxes will do so to be responsive to employees who are interested. Though offering the temporary break is optional for employers, IRS guidelines do not address whether those employers must give employees a choice, he said.
“It wouldn’t be bad if net pay increased, but the flip side is in January it’s going to decrease by about the same amount,” he said.
The federal government has opted not to give its roughly 1.3 million employees the choice. That means that while they will pay no payroll taxes for the rest of the year, those taxes will double in the first four months of 2021. Maryland is home to many federal workers.
Trump can only defer requiring employers to collect and pay payroll taxes because the Constitution grants Congress — the House of Representatives in particular — the power of the so-called purse, the ability to tax and spend money for the government. And the Republican president and the Democrat-controlled House have not been able to agree on how to stimulate the economy during the pandemic.
That’s left employers in the uncertain situation they find themselves with Trump’s executive order.
Those employers who do opt to defer payroll tax collection should implement it soon to give workers’ maximum benefits in a short window.
Business trade groups have largely opposed the deferral plan, arguing it would be more effective to instead forgive the few months of payroll taxes.
The U.S. Chamber of Commerce and nearly three dozen trade groups have asked the Trump administration and Congress to work together on a new tax relief plan. Under the current plan, they said, a worker earning $50,000, or $1,923.08 in biweekly pay, would see an extra $119.23 per pay period but owe $1,073.08 in 2021.
“Many of our members consider it unfair to employees to make a decision that would force a big tax bill on them next year,” the business groups said in an August letter to Treasury Secretary Steven Mnuchin, Senate Majority Leader Mitch McConnell and House Speaker Nancy Pelosi.
“It would also be unworkable to implement a system where employees make this decision,” the letter said. “Therefore, many of our members will likely decline to implement deferral.”
A union for federal workers is raising similar concerns.
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“President Trump’s payroll tax scheme is a scam that leaves workers with a substantial tax bill right after the holiday season,” said Everett Kelley, national president of the American Federation of Government Employees, in a statement.
Workers will have to pay double their regular payroll tax rate during the first four months of 2021, and if they’re unable to do so will rack up interest and penalties on amounts still owed.
Kelley has appealed to the head of the federal Office of Management and Budget, Russell Vought, in a letter requesting that federal workers be allowed to choose whether to defer their payments.
U.S. Sen. Chris Van Hollen, a Maryland Democrat, joined that call Tuesday, leading an effort by more than 20 senators to make the tax deferral optional for federal employees and service members.
“Federal workers and service members should not be used as pawns for a payroll tax scheme that many private sector employers are unlikely to join and where key questions remain unanswered,” the senators said in a letter to Mnuchin and Vought.
Experts said employers should not count on the possibility of the taxes eventually being waived, which would take an act of Congress and does not appear to be in consideration.
“The real risk I would suggest to clients is they end up being on the hook for the liability, unless they are very upfront with employees to say this is something you are going to owe,” Rosen said.