The Impact of the Payroll Tax Deferral May Be Minimal
Normally, the federal government takes a 6.2% payroll tax from each employee’s paycheck to fund Social Security. To help offset the economic impacts of the COVID crisis, President Trump issued an executive order waiving this through the end of the year. However, the particular situation surrounding this tax deferral may minimize its impact on employers and employees alike.
There Are Many Unknowns
There are many unknowns as to how the recent payroll tax deferral will affect employers and workers. There could be anywhere from no effect to a major impact. In some ways, it depends on who wins power in the coming election.
As it stands now, the payroll tax relief is in the form of a deferral. If there were a tax cut, there would be guaranteed money in the hands of workers, albeit at the expense of the Social Security Trust Fund. Since Congress was cut out of the loop with the executive order, what happens next is anybody’s guess.
Based on the way that federal law works, the payroll tax deferral right now is nothing more than a loan to workers. Those making under $4,000 every two weeks could see their payroll tax temporarily waived. However, this may not happen because Congress didn’t pass a law cutting the tax.
Congress Has Not Passed a Tax Cut
Ordinarily, any tax cut would need to be passed by Congress and signed by the president. This is Civics 101 and the way that every legislation happens. Tax cuts can only be passed by legislation. The president simply does not have the authority to pass a tax cut through an executive order. Some legal analysts say this would be unconstitutional because it violates the separation of powers.
The executive order was not a waiver of the tax or a cut. It was an administrative order to suspend the collection of the payroll tax. As a result, the payroll tax is still due. While you might have extra money in your paycheck today, you may still owe it to the government tomorrow.
With the executive order, President Trump was trying to encourage Congress into cutting the payroll tax for workers making below the threshold. Right now, without any legislative action, workers need to write a check at the end of the year to the IRS, giving back the extra money that was in their paycheck. As a result, employees are best advised to put away this money and not to spend it because they may have a large tax debt at the end of the year.
Some Believe the Executive Order Was Meant to Pressure Congress
Everything could change if Congress passes a law that cuts these taxes to accommodate the executive order. The thought is that Congress would not want to force military families and government workers to have to dip into their pockets to write a check. If the Republicans gain control of Congress and keep the White House, may believe a tax cut would be passed. The more interesting part is what Democrats would do if they were in power.
Accordingly, the effect of the payroll tax deferral on workers is that they should do absolutely nothing with the money until the next steps are more apparent. If nothing more is done, they will owe money at the end of the year, so there will be zero impact on their finances.
Many Employers Have Ignored the Payroll Tax Waiver
For employers, most of them have not implemented this payroll tax waiver. After checking with NJ tax lawyers, many companies in Cherry Hill and surrounding areas found that there is simply too much risk for them. If employees change jobs before the end of the year, the company may get stuck with the tax debt to the IRS. As a result, most private employers have not implemented the executive order out of concern for their own finances. For them, the uncertainty is too great.
To learn more about what, if anything, you should do in response to this tax deferral, contact NJ tax lawyer Matthew Dopkin in Cherry Hill at (215) 519-4269.