President Trump’s plan to defer payroll taxes was initiated Friday as the Treasury Department outlined the executive action.
The Internal Revenue Service released guidance earlier this month postponing some payroll taxes that would normally be due between Sept. 1 and Dec. 31 to between Jan. 1, and April 31, 2021. Under the plan, employees earning less than $104,000 will keep the 6.2% payroll tax that represents their share of Social Security taxes.
However, employees would still be responsible for the taxes under the plan, meaning those who stop taking payroll taxes now will be withholding twice as much next year. Employers can either opt-in or out of the plan, but without a guarantee the deferred payments will be forgiven, many employers have yet to embrace the plan.
Employers are terrified they will be stuck with the bill, especially if an employee leaves their job before 2021.
Trump added that if he is reelected he will eliminate payroll taxes completely, although White House officials say that plan is not currently under consideration. However, Trump has no control over that, because it would require an act of Congress to wipe out the liability altogether.
“The big issue, the surprise is that employers are going to be completely responsible for all the repayments, so they get all the responsibility for retaining the deferrals,” Pete Isberg, vice president of government affairs at ADP told CNBC.
Isberg added employees who participate in the deferral can expect a short-term boost in their pay, but they may see a dip in their take-home pay next year. That’s because not only will employees have to pay the deferred taxes from this fall next year, but they will have to start applying the payroll tax as per usual next January.
“Employees are going to notice a reduced net pay in 2021 that’s pretty much equal to the increase they’ll enjoy in the next few months if they take this deferral,” said Isberg.
Robert Delgado, principal at KPMG in San Diego told CNBC employees are not stupid and can clearly see this is not forgiveness.
“I’d say employees have to clearly understand this isn’t forgiveness, it’s deferral,” Delgado said.