Trump's payroll tax deferral may never hit some Americans' paychecks — here's why

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President Trump’s plan to allow companies to temporarily defer their workers’ payroll taxes officially kicked off on Tuesday, but many Americans will likely never see a boost in their paycheck.

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That’s because few companies are opting to participate in the tax holiday over concerns they could ultimately be on the hook for the money when it’s due next year.

“I would say that practically all of the retailers that we’ve heard from on this issue have decided that they’re not going to implement the deferral, or their company hasn’t made a decision yet,” Rachelle Bernstein, vice president of the National Retail Federation, told FOX Business.

In guidance issued by the IRS last week, the Trump administration put the onus of the tax deferral on employers. Although companies could stop withholding payroll taxes for workers earning less than $104,000 annually, employees still owe that money by the end of April 2021.

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That means workers could potentially owe an additional 6.2% in past-due taxes, until they pay back the amount deferred in 2020.

Under the executive action that Trump signed on Aug. 8, payroll taxes, which are used to fund Social Security, can be deferred for workers earning less than $104,000 annually, or $4,000 biweekly, beginning Sept. 1 through the end of the year, at which point employers are obligated to start collecting back what is owed.

The measure, which Trump said could provide some financial salve to workers and households struggling as a result of the virus-ravaged economy, came amid a congressional stalemate over another coronavirus relief package. He's indicated that he wants to "terminate" the tax so that workers are not required to pay back the money at a later point.

"If I'm victorious on Nov. 3, I plan to forgive these taxes and make permanent cuts to the payroll tax," Trump said. "I'm going to make them all permanent."

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But abolishing the debt requires an act of Congress, an all-but-impossible scenario with Democrats controlling the House.

Absent legislation, the Treasury Department's guidance indicates that after Jan. 1, companies will withhold taxes from paychecks in larger amounts so employees can pay back what they owe, meaning that millions of Americans could see a smaller paycheck in the first few months of 2021.

It's unclear what would happen if employees pocket the windfall, then stop working at their companies before the end of April, either because they quit their job or were laid off or furloughed. According to the guidance, companies can "make arrangements to otherwise collect the total applicable taxes from the employee."

“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,” Caroline Harris, vice president of tax policy at the U.S. Chamber of Commerce, told FOX Business.

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Both Harris and Bernstein noted that while Americans won’t see some financial relief now — the maximum boost workers could receive is about $2,149 — they also won’t have to grapple with a smaller paycheck at the start of 2021.

“That tends to be very upsetting,” Bernstein said. “The employer is the one the employee is going to go to and say: ‘Why am I getting less money?’”

Complicating matters, Bernstein said, is that many companies are reliant upon third-party payroll administrators, many of which are unsure how to adjust their software to calculate the four-month FICA deferral.

“What was shared with me was that the payroll administrators are saying that they have not yet figured out how to change their software to implement this rule,” she said. “If they can’t change it, the employers can’t do it … Whether you want to or not, you’re reliant on that.”

The federal government, however, said Wednesday that it will withhold the taxes from more than 1 million federal workers — a decision that Democrat lawmakers were quick to condemn.

"We are especially alarmed that after many businesses and groups, including the U.S. Chamber of Commerce, have expressed concern about the ramifications of deferral for employers and employees, federal public servants are being used as guinea pigs," Rep. Don Beyer, D-Va., and  17 other House Democrats wrote in a letter to administration officials on Wednesday.

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