This past Saturday, from the golf course, President Trump signed an executive order touted as a relief to employees from payroll tax. The order relieves employers from collecting the employees’ share of payroll tax. But issued without any guidance from the Treasury Department or the IRS, it raises many more issues than it purports to solve.
The current payroll tax is 15.3% split equally between employer and employee. So employees could see 7.65% more money in their checks if the employer doesn’t have to collect the tax. But the tax is NOT forgiven – meaning as it stands right now, employees will have to pay that 7.65% back to the Feds at some point. So basically its an interest free loan from Uncle Sam right now.
For employers though, especially large employers, it becomes an accounting nightmare. Withholding schedules are not that easy to change and then change back. It could also lead to financial uncertainty in 2021 as companies and employees wait to see whether the money will be forgiven or collected. If it is forgiven, what happens to Social Security and Medicare which are funded by the payroll tax? (BTW – if every employee withheld their payroll tax through the end of 2020 that’s $40 Billion per month less to Social Security and Medicare). Simply forgiving the money would require the government to either defund Social Security and Medicare to that amount; find new sources of equivalent tax revenue; and/or continue to balloon the deficit and debt. ( I’m old enough to remember when the GOP claimed to be the party of “debt and deficit hawks”).
Many of our employment law clients have already called us or shot us an email asking what this executive order means and whether it is mandatory. Right now it seems difficult to see how the Treasury Dept could enforce this order since employers may tell their employees that since it has to be paid back, they will escrow aside the money and if it is later forgiven, then they will give it to the employee. This would deplete the alleged purpose of the order, which is to infuse the economy with this employee’s extra cash. Of course, continuing the$600 per month unemployment benefit would also do that, but Congress can’t get that passed and the administration is against it’s extension. If employees do spend all the money into the economy, where will that money be when they have to pay it back? Maybe by doubling the payroll tax until it paid off?
That also puts the Democrats in a tough position. Fighting this order (which is “constitutional slop” to quote GOP Senator Ben Sasse) in court will likely be successful but it would be spun as the Dems taking $40 Billion per month out of the hands of US workers. Never mind that the money would have had top have been paid back anyway – its a bad look.
We are advising employers to hold off on taking any steps now until the IRS or the Treasury Dept provide some guidance. It might be worth a call to their payroll company to see how, when and how much it would cost to effectuate the new withholding scheme. If the order does go in to effect, then employers can decide what to do. Without assurances that the loan will be forgiven, employers at the very least should warn employees that this is a LOAN and not a GIFT. They should offer the employee the option of having the company hold the money back until its clear when or if it has to be paid back.
This executive order is another crisis in leadership. To issue it without guidance leaves employers large and small in the lurch. It causes further economic uncertainty in already uncertain times. If the loan is forgiven, it defunds Social Security and Medicare and blow further holes in the deficit and debt; if it is not forgiven, it will have a harmful effect on the economy when it is collected. If companies have gone under in the interim or if employees have been laid off, then there may be no way to collect it all back. In my opinion I see no good outcomes from this policy and until we get more information and guidance, its hard to advise employers how to move forward.
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