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Trump’s Optional Payroll Tax Plan May Not Pay Off, Analysts Say

Posted on Aug. 13, 2020

Complications related to the memo signed recently by President Trump instructing Treasury to temporarily suspend the employee portion of payroll taxes could dampen enthusiasm for the effort.

Trump’s August 8 executive action on the payroll tax won’t be mandatory for businesses, according to Treasury Secretary Steven Mnuchin. “We can’t force people to participate, but I think many small businesses will, and pass on the benefits,” he said August 12 on Fox Business.

Trump signed the memo directing Treasury to temporarily suspend withholding and collection of employees’ share of the payroll tax from September 1 through December 31 after negotiations in Congress over a fourth major coronavirus relief package remained deadlocked. In order to forgive the underlying tax liability, however, Congress would have to play along and sign legislation — a fact that Mnuchin acknowledged in his remarks.

Trump will “go back to Congress when he wins the election and ask Congress to have this money forgiven and have the Social Security Trust Fund fully topped up so that in no way does this impact Social Security,” Mnuchin said.

Alan D. Viard, an economist with the American Enterprise Institute, remained unimpressed with the opportunity for deferral, telling Tax Notes, “I don't think businesses of any size would be well advised to defer the taxes, and I expect that most of them will not.”

In an August 12 blog post, Viard highlighted concerns about the prospect of paying back the deferred taxes and the practical difficulties employers will face if they’re held responsible for doing so, particularly if employees wind up leaving their jobs before the payback period begins. “Many employers will surely hesitate to wade into this quagmire,” he wrote.

Legal Roadblock

Some observers say the IRS and Treasury will first have to reckon with a regulatory roadblock before they can start implementing the memo. 

The memo instructs Treasury to “defer the withholding, deposit, and payment” of employees' share of payroll taxes on wages that are paid between September 1 and December 31, citing the executive emergency disaster authority under section 7508A to temporarily postpone tax deadlines. 

According to Bryan Camp of Texas Tech University School of Law, however, the regulations under section 7508A may block the IRS: “The [IRS] can issue a postponement of all kinds of tax obligations, but probably not employment tax obligations,” he told Tax Notes.

The regs under section 7508A allow for the postponement of employment tax payment deadlines, but they specifically exclude “deposits of taxes pursuant to section 6302 and the regulations under section 6302.” Camp noted that the withholding and deposit of employee payroll taxes provisions under sections 3101 and 3102 don’t say when that must be done; rather, that’s found in section 6302, and the regs don’t allow for section 7508A to apply to that section. 

Camp, a former attorney in the IRS Office of Chief Counsel, speculated that the IRS might issue a notice implementing the memo that ignores that, in which the agency would essentially be signaling that it won’t enforce the existing regs and that taxpayers should rely on the notice. But that still leaves employers in a quandary, he said.

“In a year, there might be different people in the IRS, and you have the choice of relying on a reg which has the force and effect of law, or relying on a notice which was put out under a great deal of political pressure,” Camp said. “There is a lot of potential for Monday-morning quarterbacking, which really makes employers nervous.”

The existing regs could also be changed with the issuance of temporary regs superseding the old, but that creates the potential for more time lag, Camp said.

Full Steam Ahead

Alternatively, Treasury could just ignore a regulatory challenge and count on the consequences taking too long to materialize.

Trump’s payroll tax suspension lasts only until December 31, which wouldn’t allow time for lawsuits against the memo to work their way through the courts, Camp observed. Employers that are negatively affected by the memo could consider suing and trying to obtain a court injunction, but it’s unclear how much merit a suit would have, he said.

Camp added that the Anti-Injunction Act, which prohibits lawsuits to restrain tax assessment or collection, likely wouldn't apply here, because in this case a lawsuit would be filed not to restrain the IRS, but to make it continue collecting the tax.

But Wait, There's More

Veena K. Murthy of Crowe LLP similarly questioned the legal underpinning of the memo. She noted that section 7508A was enacted as a statute to allow postponement of tax payments or filing deadlines because after hurricanes or other disasters, like the September 11, 2001, terrorist attacks, many taxpayers don’t have access to records needed to comply with their tax obligations.

In this situation, however, no postponement is needed, because the employees’ payroll taxes are coming out of their salary, which the employer is already paying. “So where’s the 7508A relief needed?” Murthy asked. “I don’t see it as fitting within 7508A if an employer is able to pay salary.”

George Callas of Steptoe & Johnson LLP also found fault with the memo’s legal basis. Section 7508A operates by disregarding a specific time period, but it’s unclear how that time period — like the September 1 through December 31 period specified in the memo — would be disregarded when it comes to withholding obligations, he told Tax Notes.

“The statutory obligation to withhold does not, in and of itself, include a deadline or due date. Rather, the withholding obligation is established when the wage is paid,” said Callas, a former Republican senior tax counsel to former House Speaker Paul Ryan. If, for example, an employer pays its employee $100 at the beginning of the deferral period, it would be obligated to withhold tax on those wages on January 1 — even, somehow, if the employee no longer worked there.

“But this is logically absurd, given that the money is out the door, and thus withholding is impossible,” Callas concluded. 

To Withhold, or Not to Withhold?

Given all the questions about how the memo will be implemented, many observers say employers would be better off steering far clear of the opportunity.

“It’s going to be a very small amount of benefit to a rather constrained subset of workers, but it’s going to create a huge cost to employers,” Camp said. “Small employers like my church — they have two employees and no bookkeeper — how the heck are they supposed to figure this out?”

Murthy was similarly unimpressed. “There are so many possible issues that arise with relation to this, I don’t know where to start,” she said. “It would be different if it were a tax cut, but as a deferral, and because it’s being done through an inappropriate context, I just find so many problems with it I wouldn’t generally recommend it.”

Edward S. Karl of the American Institute of CPAs observed that the memo “really does need quite a bit of guidance,” and said that in the meantime, many of his organization’s members are taking a wait-and-see approach to the action.

Treasury has a number of burning questions that it needs to address, including how Forms W-2 will be modified, how deferred taxes are repaid, who bears the onus for repayment, and what the mechanism for repayment will look like, Karl continued. The IRS and Treasury will also need to more elaborately define what constitutes an eligible employee and how wages and compensation are defined, he said. 

Ideally, the employee rather than the employer should be the one making affirmative elections for deferral, Karl said, although he observed that that would create its own practical difficulties and questions.

“The critical next juncture is to see how Treasury puts parameters and understanding around this, based on such a generic memorandum,” Karl concluded.

Follow Jonathan Curry (@jtcurry005) on Twitter for real-time updates.

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