Why Trump's employee tax deferral should be ignored

[Michael Plaks]

This is an attempt at a non-technical explanation. I intentionally use rounded percentages and simplified formulas, making the numbers incorrect. The purpose is to merely illustrate the idea as simple as possible. Also, let's avoid politics.

1. The concept

John works for ABC LLC and brings home a $1,000 paycheck twice a month, after all withholding. Part of these withholdings is John's share of his Social Security taxes, aka FICA taxes, equal to about 6%.

Under President Trump's executive order, for the next 4 months, Sept-Dec of our troubled year of 2020, John can postpone paying this 6% tax. How does it help John? His next 8 paychecks will become about $1,060 instead of $1,000. Over the remaining 4 months of 2020, John brings home extra $500 total or so.

How does it help ABC LLC? It does not. Normally, they would have to give this $60 per paycheck to the IRS, and now they would give it to John instead.

2. It is a bad idea for John

The tax is only postponed, not removed. The president cannot remove any tax, he can only delay it, which is what he did. Only the Congress can remove or forgive it, but judging from the initial reaction of the House Democrats, it is unlikely at this point. All bets are off after the election.

After the 4 months, the deferral stops. John's paycheck goes back to $1,000 in January. What about the postponed tax? Per the just issued IRS Notice 2020-65, John needs to repay the postponed tax during January-April. So for those 4 months, his paycheck drops to $940: his normal $1,000 minus the catch-up for the previous 4 months.

Result: John has 4 months of slightly increased paychecks of $1,060 immediately followed by 4 months of reduced paychecks of $940. 

Even considering our national give-me-now mentality, I just don't see the appeal.

3. It is a horrible idea for ABC LLC.

In May of 2021, ABC LLC will owe the IRS that extra $500 temporarily given to John during Sept-Dec of 2020. The company is supposed to collect it from John during Jan-Apr, but what if he quits, if he is fired, if the company temporarily or permanently goes out of business or any of the other unpredictable events happen?

ABC LLC, not John, seems to owe this tax no matter what. It is still debatable (and has been debated a lot) since there's practically no official guidance yet. For now, unless it is clarified otherwise in the near future, the company either somehow collects the tax from John later or has to pay out of its own pocket.

Please do not try to apply logic. Just look at PPP, EIDL, employer tax deferrals and everything else 2020 that was implemented half-baked and keeps changing, often in defiance of common sense.

Bottom line

As it stand today, the employee receives a very small and very short-term interest-free loan.

The employer receives no savings, huge compliance headaches and is possibly left holding the bag in the end.

Hard pass.