All deferred money must be paid back at end of the year
President Trump’s payroll tax suspension that goes into effect Sept. 1 is a deferral and the money will have to be paid back.
“All it is, is an extension of time for employers to collect and remit payroll tax otherwise due,” said Elaine Wilson, a West Virginia University law professor who heads the school’s tax and estate planning law curriculum, in an email to The Dominion Post.
President Trump announced the payroll tax suspension designed to sidestep Congress after talks on a coronavirus relief bill fell apart.
“The President doesn’t have the authority to change the underlying tax liability (only Congress can do that), only the power to postpone the due date because of a federally declared disaster.”
Under Trump’s executive order, the deferral will be from Sept. 1 — the day it starts — and remain in effect through Dec. 31, 2020. Anyone earning less than $100,000 a year would benefit, Trump said.
The catch, however, is the deferred money comes from FICA, the payroll tax that helps fund Social Security. The employer pays half of the 12.4% tax, while the employee pays the other half through withheld money.
Trump’s order calls for employers to stop withholding half of the tax from a worker’s check. But, the employer would still have to contribute for each worker. Also, Trump’s order said the Secretary of the Treasury will explore ways — including legislation — to eliminate the obligation to pay the deferred taxes, according to media reports.
“However, the postponement of the due date doesn’t really apply to YOU,” Wilson said. “It applies to the employer’s obligation to collect it on your behalf and pay it to the government quarterly.”
So what’s an employer to do?
Wilson said there are three options for employers including to continue to withhold the tax. Or, the employer can collect the money from employees as usual, but hang onto the funds and remit it to the government at the extended date.
By hanging onto the money, the employer gets to hold onto the liquidity and interest, Wilson said. The downside is the employee does not benefit and there is no economic stimulus through additional spending.
The last option is not to collect the tax at all. Collect the funds and remit it at a later date. Employees have more money to spend, but the tax is still due.
Dale Sparks, owner of All-Pro Framing & Photography in Morgantown and WVU sports photographer, said it is going to be business as usual for him.
“If we pause with payroll taxes, it will be due in one lump sum at a later date,” he said. “I have decided, with my few employees, to stay the course on payroll taxes. This way neither the employer nor employee will possibly be hit with a large tax bill at a later date. Basically, a roll of the dice with the uncertainties of COVID-19 and the upcoming election.”
Wilson reiterated Trump’s order is not a tax holiday, only a deferral.
“The reality is that no one knows how this is going to work as a technical matter and there are lots of open questions,” she said. “So most employers are watching it and waiting for guidance.”