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President Trump's payroll tax holiday: Most workers will have to wait for a raise

Trump's executive actions spark confusion
Trump's executive actions spark confusion 02:46

President Donald Trump's plan to allow companies to defer employees' payroll taxes, one of the main components of executive orders aimed at providing Americans with additional financial aid amid the coronavirus-battered economy, kicked off on Tuesday. But few companies are opting to take part in the plan.

Mr. Trump's plan would give workers an average of $2,200 in additional pay over the next four months — but payroll and accounting experts say the tax-deferral plan has drawn lackluster interest at its debut.

Corporate advisers who work with large and small employers say they have fielded plenty of questions from their corporate clients about how Mr. Trump's voluntary deferral plan might work. But very few companies have said they will actually participate, casting doubt on whether the payroll tax deferral will provide much, if any, of an economic boost.

"At this point, so far I haven't heard a great deal of enthusiasm for the program," said Richard Shapiro, a tax director at accounting firm EisnerAmper. "There is a great deal of risk for employers in the participating process."

No holiday

Mr. Trump's effort to boost take-home pay won't cut the amount of payroll taxes workers will actually owe. Rather, his executive order creates a payroll tax "holiday," allowing companies to delay the collection of payroll taxes, and artificially boost paychecks, for four months. 

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Employees will still be on the hook for the taxes, which they'll have to begin repaying with the first paycheck of 2021. That means they would owe an additional 6.2% in taxes, until they pay back the amount they had deferred in the current tax year. 

Shipping giant UPS has said it won't stop withholding payroll taxes from its employees for the time being. Walmart, the nation's largest employer, and JPMorgan Chase, the nation's largest bank, did not return CBS MoneyWatch's requests for comment about whether they'll participate in Mr. Trump's payroll tax holiday. Most other large companies have been silent on the issue. 

Meanwhile, the U.S. Chamber of Commerce has said it doesn't believe many of its members will participate.

Complicating efforts is the fact that the government only issued guidance on how the tax holiday would work on Friday, giving companies only one business day to prep their payroll systems.

What's more, the IRS and Treasury guidance states that companies — not workers — will eventually be on the hook to repay deferred payroll taxes. For instance, if a company defers the tax and then an employee quits or is laid off between September and the end of the year, that company would need to make up what is owed to Uncle Sam.

Another problem: At this point, many companies don't yet have the ability to stop withholding payroll taxes. ADP, which, as the nation's largest payroll processing company handles one out of every six paychecks paid in the U.S., told CBS MoneyWatch on Tuesday that it's not ready to implement the payroll tax holiday. 

The payroll processing firm said it hopes to offer the option to employers later this month. Yet even a few weeks may curtail the effectiveness of the order, which expires at year-end. Workday, another large payroll processing company, did not return a request for comment.

Federal workers have no choice

One large group of employees will have no choice but to participate: Federal workers. The U.S. government will implement an across-the-board payroll tax deferral for about 1.3 million federal employees starting in mid-September. Those workers will then be forced to pay double their normal payroll taxes starting January 2021.

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Carrie Hoffman, a partner at law firm Foley & Lardner, said some of her clients began offering the tax deferral option to employees on Tuesday, including one large employer. She added that she has advised her clients to make it clear to their employees that they will be the ones who have to repay the money in early 2021 if they take the deferral now. 

She has also advised clients to require employees who defer the tax to sign a written agreement that would allow their employer to take any deferred taxes out of their final paycheck, should they leave the company before the taxes are fully repaid. In most states, it's a violation for companies to withhold excess tax without an employee's approval.

Free money risk

Companies that don't offer the deferral risk upsetting their employees who would like to take advantage of what is essentially a short-term no-interest loan from the government. And there is a chance the money won't have to be paid back. 

Mr. Trump has said he'll will push to make the payroll tax holiday a permanent four-month cut if he's re-elected, meaning those taxes would not have to repaid. But by that time, employees of companies that didn't offer the deferment option will have already had their payroll taxes deducted from their paychecks, and will be unable to get it back. However, even if Mr. Trump is reelected, he would need Congressional approve to eliminate four months of the payroll tax, which is the main source of funding for Social Security. 

"I spent most of my weekend working on this," said Hoffman. "I have clients who are telling employees here's what the risk is, but there is a reward as well."

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