By Peter Mastrantuono
In the face of a Congressional impasse on a new fiscal relief bill, President Trump signed multiple executive orders on August 8th in an attempt to preserve the nascent economic recovery. Perhaps the most controversial and confusing among the president’s executive orders was the order to suspend workers’ Social Security payroll taxes during the final four months of the year.
The Payroll Tax Cut Order Explained
President Trump’s executive order suspends Social Security taxes (but not Medicare taxes) for workers with wages or compensation of less than $4,000 (pre-tax) on a biweekly basis.
The waiver of Social Security withholding will commence on September 1, 2020 and remain in effect until December 31, 2020. (The CARES Act already gives employers the option of deferring their matching 6.2% Social Security payments through the end of the year.)
There is one, hugely important caveat, however. The Social Security tax holiday is not, as it stands today, a tax cut or forgiveness (only Congress can do that), but merely a deferment in the payment of taxes. Without enabling legislation from Congress that ratifies the deferment as permanent, the deferred payments must begin being repaid starting in January 2021.
Workers May Benefit…
Workers receiving less than $4,000 every two weeks will enjoy an immediate 6.2% increase in their tax home pay—an amount that either ends becoming extra cash thanks to a brief tax respite or nothing more than a short-term, interest-free loan.
This uncertainty may leave some workers asking to opt out of any deferral to avoid a higher income tax bill or potentially having to rectify the deferral payments on their 2021 tax returns.
…But Employers Bear the Burden
President Trump’s order leaves open a number of critical questions that the IRS will need to answer, including:
- Are tips or bonuses included in the calculation of wages and compensation?
- Can employers elect not to defer employees’ Social Security withholding?
- Can the employer choose to not pass the deferred funds to employees, instead keeping the funds in escrow awaiting the outcome of any Congressional action?
- How will deferred taxes need to be repaid and over what time period?
- How should any deferred amounts or future repayments reflect on an employee’s W-2 form?
The most challenging aspect from an administrative point of view for employers (or the payroll processor they use) is that the deferral does not apply to all employees, requiring programming to isolate a subset of employees for special treatment.
Programming, in any event, cannot begin until the IRS provides guidance to employers and payroll processors. Any delay in IRS guidance will delay programming, which, in turn, will delay employees receiving the bump up in their take-home pay.
Individuals and businesses will be anxiously awaiting any announcement from the IRS that helps clear up the current confusion, as well as any legislative action from Congress before the end of 2021. In the meantime, many advisors and their firms are closely paying attention to this and other government related incentives and may be helpful with additional insight.
Peter Mastrantuono is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Peter worked for over 30 years in the wealth management industry, focusing on retirement planning, investing, asset allocation and financial planning.