Employers have been put in a tough spot by the Trump administration -- they now have the option to temporarily stop withholding Social Security taxes from their employees' paychecks for the rest of the year.
But will they choose to?
While such a move would increase workers' take-home pay now, there's a catch. And employees who understand that may not be so eager for the bigger paychecks.
Just last Friday, the Treasury issued guidance for an executive order issued by President Trump giving employers the option to temporarily defer their workers' payments of Social Security taxes -- which amount to 6.2% of their wages. The deferral option is in effect for any paycheck issued from September 1 through the end of this year. Only employees whose regular pre-tax income is less than $2,000 a week (or less than $4,000 every two weeks) would be eligible.
The catch for workers and employers
In theory, the move is meant to help boost the economy because deferring Social Security taxes would put more money in workers' pockets this year. Someone making $50,000, for instance, would see an extra $119 in her paycheck every two weeks until December 31.
But the catch is you'd have to pay those deferred taxes back between January 1 and May 1 of next year, said Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting. So that same $50,000 earner would have to pay not only her regular Social Security taxes on her earnings for the first four months of 2021, she'd also have to pay the extra $119 per paycheck that her employer deferred this year.
Employers don't want to leave workers on the hook for that, said Neil Bradley, chief policy officer for the US Chamber of Commerce. "You're going to have to double their taxes beginning in January. You're making a decision about people's ability to make ends meet next year."
What's more, employers would be responsible for paying the deferred taxes back if the employee doesn't. That will be an issue if an employee or seasonal worker leaves a company by early next year. Employers either will have to scramble to withhold much of that person's last paycheck or foot the bill themselves. And irony alert: If a company does foot the bill, that could be considered taxable compensation to the ex-employee and subject to both income and payroll taxes, Luscombe said.
Should an employer want to implement the deferral, it will take a few weeks to adjust their payroll systems. Employers that administer their own systems have a lot of work ahead of them. Those that use big payroll providers, like ADP, won't have to do the technical heavy lifting, but they will need to clearly communicate what's happening to their employees.
Companies are not required to give employees a choice in the matter.
"It's a business decision," said Pete Isberg, ADP's vice president of government affairs. But ADP is changing its systems so clients may choose to give workers the chance to elect deferral if they wish.
It's still too early to tell how many private sector employers will choose to implement the payroll tax deferral. But based on feedback they've gotten so far, both Bradley and Isberg don't expect many will. "The best feedback we're getting is 'We're still looking at it,'" Bradley said.
And based on what ADP has heard anecdotally, Isberg said, "Most employers are leaning toward not adopting this program."
