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Payroll Tax Deferral Not Worth the Hassles for Employers


In response to Congress’ inaction on further economic stimulus to combat the COVID-19 recession, President Trump issued some bold executive orders on August 8th.  One of those orders allowed enhanced unemployment benefits for unemployed Americans to resume, albeit at a lower amount than originally provided by the CARES Act.

Trump also issued an order creating a payroll tax deferral for American workers.  Essentially, this means that employers may discontinue collecting the employees’ portion of Social Security tax, from September 1 through the end of 2020.  Other payroll deductions, including Medicare Tax, federal income tax and state income tax, are not included in the executive order.  For an average worker in Wisconsin, that deferral would put an additional $1000 in his or her pocket, over the final 4 months of the year.

However, this is not a “tax cut” or a “tax holiday.”  That money is still owed to the federal government in 2021.  It will be up to the employer to somehow recoup that money from employees at a later date, as the employer has a legal responsibility to make sure those taxes are paid.  That probably means double Social Security deductions for the employees during the first four months of 2021, which will not be popular with employees.  It’s going to seem like a “bait and switch.”  In the meantime, if a business closes or a worker leaves their job, that complicates things for employee and employer alike.

While it’s well-intentioned, I don’t think employers who understand this tax deferral option are going to implement it.  Barring a change in the law to forgive these taxes (which Trump has requested, but is unlikely), employers would be essentially agreeing to assume responsibility for the deferred taxes.

The U.S. Treasury Department has not yet issued guidance on the tax deferral – such as exactly when the taxes would have to be paid back, but it’s pretty clear that the policy won’t have much of a stimulus effect on the economy.  Whether it’s the employer or the employee, someone is going to have to hold onto that money so that it can be paid back.  If the money is not being spent, then it creates no economic stimulus.

Here are some potential alternatives:

  1. Ignore the payroll deferral order. It is not a mandate.
  2. Ask your employees, either collectively or individually, if they want their FICA deduction reduced for four months, but then doubled for four months in 2020.
  3. Give your employees a bonus, instead. That would avoid all the hassles of this deferral, it would provide an actual stimulus to the economy and it would leave your employees feeling happy instead of duped.

*This is for informational purposes for members of PIA of Wisconsin.  It is not intended as legal advice.

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