Over the weekend, President Trump instructed the Treasury Department to defer withholding of certain payroll taxes from September through the end of the year. The measure, one of four executive actions signed by the president to offer pandemic relief, is being referred to as a “payroll tax holiday.”
Since Mr. Trump is only suspending the tax, not cutting it, the money that companies would cease to withhold would have to be repaid next year barring legislative action. For companies, this will require complex accounting maneuvering. For workers, it could mean an unwanted tax liability in 2021, making a tax break more of a headache.
“This is not a holiday, because there’s a bill at the other end of it,” said Isaac Boltansky, an analyst with the research firm Compass Point.
Some employers expressed frustration with the uncertainty Mr. Trump’s order has created.
“I would rather just keep paying the payroll tax as it is now and deducting from the employees,” said Arnold Kamler, the chief executive of the bicycle company Kent International. “If it does go into effect, we’ll be very up front with the workers and tell them don’t spend it, just put it away.”
The Treasury Department is expected to release information about how the payroll tax suspension will work.
David French, senior vice president of government relations at the National Retail Federation, said that the group had told members to be ready for additional guidance about the policy.
“Clearly there are a lot of unresolved issues with it,” Mr. French said on Monday.
If every business in the United States deferred their payroll taxes to the end of the year, it would add up to $40 billion per month to the paychecks of Americans, JPMorgan Chase said in a research note on Monday.
But many companies and employees might be hesitant to opt into the program because it is not clear whether Congress will eventually forgive the deferred taxes, or if the full sum will be due at a later date.
“Some employees may not want to do this at all if they perceive that maybe Congress isn’t going to follow up with legislation to forgive this,” said Pete Isberg, vice president of government relations for ADP, a payroll specialist that serves more than 800,000 businesses. “It’s a little bit of a risk that Congress may not act, and if you’re deferring a significant amount of taxes the reality is, a few months later, you’re going to have to come up with that cash and pay those taxes.”
Furthermore, the rollout itself may be extremely expensive and time-consuming for businesses. The payroll tax rate does not usually change in the middle of the year, said Mr. Isberg, and the shift will require businesses to reprogram their payroll systems.
“Things of this magnitude normally take six months or so for orderly programming,” said Mr. Isberg.
Many businesses are likely to hold off on making any decisions until they receive additional guidance from the federal government. One option some employers might consider is to continue withholding the tax and repay workers later if it is eventually forgiven. That option would, of course, defeat the purpose of stimulating the economy now when it could use the help.