Trump Payroll-Tax Deferral Leaves Employers Wary as Plan Starts

By Richard Rubin

WASHINGTON -- President Trump's payroll-tax deferral plan started Tuesday, but many employers seem unlikely to adopt the policy, which would effectively give their workers a short-term interest-free loan.

Employers participating in the president's plan would stop withholding some Social Security taxes for the rest of 2020, then withhold twice as much as usual early next year to pay the delayed taxes. That would put more money in workers' pockets temporarily and give them a chance at keeping that money permanently if Congress later forgives the taxes.

But under IRS guidance released late Friday, employers would be on the hook for money that doesn't get repaid. And they would face implementation costs and challenges in explaining any changes to workers.

"The initial concerns that we had about the deferral have just been identified as right," said Michael Chittenden, a tax and benefits lawyer at Covington & Burling LLP in Washington who expects few large employers to participate. "The latest guidance does nothing to allay the concerns that employers had before. If anything, it makes those concerns more valid."

As of Tuesday, employers can stop withholding the 6.2% employee share of Social Security taxes for workers earning under $104,000 on an annualized basis. Under IRS guidance issued late Friday, those taxes must be recouped from paychecks in the first four months of 2021.

"It put all the burden and all the responsibility on employers," said Pete Isberg, vice president for government relations at Automatic Data Processing Inc., which runs payroll for 670,000 U.S. employers. ADP is making computer changes so employers can start implementing the tax deferral this month and offer employees a choice of whether to participate.

Employers can try to make other arrangements for workers who depart before April 30, 2021, before all their deferred taxes are repaid. One likely scenario, Mr. Isberg said, would be for any deferred taxes to come out of a departing worker's final paycheck, but that could consume up to half of a worker's take-home pay in some cases.

United Parcel Service Inc. will continue to withhold payroll taxes and send them to the federal government, the company said Monday. Other large private employers, including Walmart Inc., Target Corp. and Starbucks Corp., didn't respond to requests for comment.

"Given the numerous implementation challenges, remaining outstanding questions, and the extremely short implementation period, employers are likely to continue withholding and remitting payroll taxes to the Treasury," said Caroline Harris, chief tax policy counsel at the U.S. Chamber of Commerce. "In order to achieve relief that is workable for both employers and provides relief to American workers, we urge Congress and the Administration to come together and continue work on legislation."

Mr. Trump acted on his own to order the payroll tax deferral while Congress was deadlocked over economic relief. He used a law that lets the government delay tax deadlines during disasters and has asked Congress to forgive the taxes and use general-fund money to fill any gap that it creates in Social Security funding.

"Donald Trump's scam is obvious -- juice paychecks before the election and sock workers with a massive tax bill early next year when he'll be out of office or never have to face voters again," said Sen. Ron Wyden (D., Ore.).

Employers may be wary of entering a situation where they are withholding double taxes in early 2021 and explaining that to employees, and there may be state-law implications, said Robert Delgado, principal-in-charge of compensation and benefits for KPMG LLP's Washington national tax office. KPMG itself hasn't made a decision yet.

Neither has the state of Texas made a decision for its government workers.

"We're still trying to figure out the implications and we'll have a better sense of this in the coming weeks," said Kevin Lyons, a spokesman for the state comptroller's office.

The largest U.S. employer -- the federal government's executive branch, controlled by Mr. Trump -- is poised to move ahead and begin deferrals.

"As an employer, the executive branch is implementing the deferral to give our employees relief as quickly as possible, in line with the presidential memo," said Rachel Semmel, a spokeswoman for the Office of Management and Budget. "The President took action when Congress didn't."

Those tax deferrals for federal employees will create pressure on Congress to waive the deferred taxes next year by creating a potential built-in worker constituency for action.

"Instead of this dangerous scheme, President Trump ought to encourage the Senate to come to the table and approve legislation passed by the House" that includes direct payments to households, said Everett Kelley, president of the American Federation of Government Employees.

Some smaller employers may participate, including TerraSlate, a Denver company that makes waterproof paper.

"It's a good thing even if you have to figure out part of it later," said Kyle Ewing, the company president. "Anything that helps me take care of my employees is something I appreciate."

Write to Richard Rubin at [e-mail]