On August 6, 2020, the Senate adjourned without adopting a stimulus plan. Senate Majority Leader Mitch McConnell (R-KY) was not involved in the talks, leaving Senate Minority Leader Chuck Schumer (D-NY) and House Speaker Nancy Pelosi (D -CA) work directly with Treasury Secretary Steve Mnuchin and White House Chief of Staff Mark Meadows. On Friday evening, the parties said they had not reached an agreement.
Today, seemingly frustrated by Congress’ inaction, President Trump signed executive orders that would change the current pattern.
Among them? A deferral of social charges. More specifically, the Order says:
To that end, I call today on the Secretary of the Treasury to use his authority to defer certain tax obligations to American workers who need them most. This modest and targeted action will put money directly into the pockets of working Americans and generate additional incentives for work and employment, when the money is needed most.
You can read the entire order here.
Previously, tax policy gurus – right and left – had weighed in, with many doubting President Trump had the power to act on payroll tax collection. Most tax experts believe that only Congress has the power to stop tax collection.
The power to act can be found in the Tax Code, in particular in Article 7508A which begins: In the case of a taxpayer determined by the secretary to be affected by a disaster declared by the federal government (as defined by subsection 165 (i) (5) (A)) or terrorist or military action (as defined in section 692 (c) (2)), the secretary may specify a period of up to one year which cannot be taken into account in determining, under tax laws internal, with respect to any tax liability of that taxpayer—
This usually limits the relief to specific geographic areas. However, on March 13, 2020, the President of the United States issued a declaration of emergency under the Robert T. Stafford Disaster Relief and Emergency Assistance Act in response to the 2019 Coronavirus Pandemic (COVID-19) (declaration emergency). In other words, all over the United States is currently being labeled a disaster.
The same section of the Tax Code was cited when the tax season filing deadline was extended from April 15 to July 15.
But here’s what worries some tax policy experts: The president may have the power to postpone the collection of payroll tax under the Internal Revenue Code, but not the power to forgive such taxes. This authority was given only to Congress. The decree recognizes this by declaring: The Secretary of the Treasury will explore avenues, including legislation, to eliminate the obligation to pay deferred taxes in accordance with the implementation of this protocol.
To be clear, the president is asking the Treasury to check if these payroll taxes can be forgiven. For now, however, the decree only allows postponement. This means – without further action – that taxes must be paid. The postponement is in effect for the period from September 1, 2020 to December 31, 2020.
Some tax experts also asked earlier this week whether the president has the power to cap or limit the carry over. But that is precisely what has happened here. The decree says that the relief is limited to “any employee whose amount of wages or compensation, as the case may be, payable during any bi-weekly pay period is generally less than $ 4,000, calculated on a prior basis. tax, or the equivalent amount relating to other pay periods. This generally equates to a restriction for those making more than $ 100,000 per year. Assuming a full deferral, that means the average worker will be able to carry over just under $ 1,000 for the duration of the deferral, or roughly $ 80 / week.
Everyone is still responsible for collecting, withholding and remitting tax. How this will apply to workers with more than one job (or with side gigs) is not yet clear. The decree ordered the Treasury to issue guidelines on the matter.
Another potential problem? These payroll tax funds typically go into Social Security and Medicare trust funds (which is why we call them “trust fund taxes”). Historically, Congress appropriated general fund revenues when cutting payroll taxes so as not to disrupt Social Security and Medicare trust funds. This is not what is happening here, but remember that for now it is only a postponement. Normally, a carryover just throws the box on the road. But President Trump signaled that it could be more than a postponement earlier today, saying, “If I am victorious on November 3, I plan to forgive these taxes and make permanent mass tax cuts. salary… I will do them all. permanent. ”
What this means for Social Security and Medicare in the future is unclear and seems to contradict President Trump’s assurance in 2015 that “I am not a cutter. I will probably be the only Republican who doesn’t want to cut social security. »
He continued in 2015 by tweeting: I was the first and only potential GOP candidate to declare that there will be no cuts to Social Security, Medicare and Medicaid. Huckabee copied me.
In 2017, Reince Priebus made it clear on CBS
However, payroll taxes fund social security and health insurance programs. It is unclear where the money would come from if payroll tax deferrals were turned into permanent cuts. You can read more about the payroll tax cuts here.
And complicate the problem further? Under the CARES Act, employers can already defer filing and paying the employer’s share of social security taxes. The deferral applies to deposits and payments by the employer of social security tax that would otherwise be required to be made during the period beginning March 27, 2020 and ending December 31, 2020, the half due on December 31, 2021, and the balance due on December 31, 2022. The relief also applies to self-employed workers.
I know… I know… My tax colleagues are already complaining about what these payroll tax forms might look like.
There’s a lot to unbox here, so stay tuned: more is sure to come.
The last payroll tax cut for American workers was imposed by the Obama administration in 2011, despite fears the cut would increase the federal deficit. The theory then – as now – was that the benefit would outweigh any costs. After the first round, Congress renewed the temporary payroll tax cuts in 2012.
In response to the executive order, Senator Ron Wyden (D-OR) tweeted: This scheme is a classic Trump jerk: playing the role of leader while depriving families of the support they need. This “plan” fails to restore supercharged unemployment and would throw already overburdened state programs into chaos, making it harder to get benefits.
To learn more about payroll taxes – and what payroll tax cuts traditionally looked like – check out this previous article. I will continue to update you as more information becomes available.