While negotiations on a Phase 4 invoice Stuck in Congress, President Trump has decided to alleviate some of the problems caused by the shutdown of several relief programs.
On August 8, the president signed four executive orders offering $ 400 in federal aid for the unemployed– down from the $ 600 they were receiving before benefits were phased out at the end of July – continued student loan relief and a moratorium on evictions. Another ordered a payroll tax holiday for Americans earning less than $ 100,000.
While none of these measures contain direct support for small businesses, they create a minefield of tax problems.
In particular, the decree which defers the salary portion of social charges for the rest of the year. That’s 6.2 percent for Social Security and 1.45 percent for Medicare for workers earning less than $ 100,000 a year. If workers forgo the payroll tax, their incomes will increase – money they could spend, theoretically. But this is where the confusion begins. If their income increases, their tax liability could also change – and that could affect how much employers would have to withhold from checks. In addition, the payroll tax holiday is temporary; workers will still be liable for the tax, just at a later date.
While the president has promised to forgive responsibility and eliminate the tax liability altogether if re-elected, that assumes he can get congressional approval – which puts a lot of confidence in the GOP’s ability to win big in November. And that assumes voters don’t want to fund Social Security and Medicare.
It is not clear that the presidential decrees are legal. “I don’t see how he can make them permanent without legislation, and even the temporary suspension of tax collection is questionable legality,” said Robert Litan, economist and non-resident senior researcher at the Brookings Institution, a non-partisan think tank. in Washington. Litan suggests that the orders will face legal challenges, possibly from future Social Security recipients or from Congress itself. “Congress has the power to tax, not the president, whose constitutional duty and power extends only to the collection of taxes,” he adds.
For businesses, the prudent thing is to hold on tight and not change payroll deductions or income taxes, says Joe Manganelli, founder of New York-based strategic consulting and financial management firm, Calculate. His advice? Employers should hang on to the employees’ share of payroll taxes that would normally go to the government. “This obviously goes completely against the president’s intention to put more money in people’s pockets,” but, he adds, “it is a safer decision when the result is not not clear”.
Here’s why: The decree postpones the employees’ share of payroll taxes. However, this money comes directly from the employer’s bank account via payroll distribution. So if companies stopped collecting these funds in the hope that they would be forgiven and they are not, they themselves could later be subject to the tax later on. “Will it be the employer’s job to set aside this money to pay later or the employees?” ” he asks. This is an open question. “I could see a lot of disgruntled employees, who didn’t realize that they had to save almost 8% of their salary for four months,” he adds.
He says if the president eliminated the employer’s share of payroll taxes, companies would get a hiring incentive. “If this leave were applied to the employer, one in 13 employees would essentially be paid,” Manganelli explains. “It could probably encourage companies to reinvest that in hiring.”
There is also the question of where the president would get the money to fund an extension of federal unemployment insurance benefits. Trump has called for diverting other funds, including federal disaster assistance, to create a bonus of $ 400 per week. It also asks states to share 25 percent of spending for the increased benefit. Does that mean he will turn off the tap on the federal disaster loan program that also benefits small business owners, known as Economic Disaster Lending (EIDL)? Would that involve redirecting the remaining funds from the defunct Paycheck Protection Program, which provided assistance to besieged small businesses? And where will already struggling states find the funds to meet their share of contributions?
These issues should put additional pressure on Congress to act, suggests Litan. “I guess a lot will depend on the reaction of the stock market to the breakdown of talks on Monday or later this week.”