Payroll tax cut truth time: You have to pay back the ‘holiday’ in January

A payroll tax holiday officially began on Sept. 1. The tax deferment pushed by President Donald Trump since the earlier part of the coronavirus pandemic could give Americans some financial relief similar to the stimulus check,  enhanced unemployment benefits and an eviction moratorium. There are some drawbacks with the “holiday,” and Democrats in the Senate are moving to try to overturn it. 

Trump’s executive memo to create the tax holiday was signed on Aug. 8 along with three other executive actions. His move came as the Democrats and Republicans continue to negotiate over another stimulus package, which may include a second stimulus check. 

ADP, the largest payroll processor in the US, said Tuesday that a portion of its clientele — those using its TotalSource service — won’t participate in the payroll tax holiday, according to a report from Fortune. ADP TotalSource is a co-employment service in which the company handles administration tasks such as payroll and benefits on behalf of its client. TotalSource service clientele make up less than 2% of the company’s hundreds of thousands of customers.

“ADP TotalSource has decided to not take part in the deferral, and it will not be an option for any client or employee,” a company spokesperson told Fortune. 

A spokesperson for ADP told CNET on Wednesday that it’ll roll out a tax deferral feature to its clients in the near future. 

Here are the details you need to know about the payroll tax cut, including how long it lasts. 

What is the payroll tax and how is it used? 

A payroll tax is a tax on both an employer and employee that contributes to federal programs such as Medicare or Social Security. In the case of Trump’s executive action, it’s referring to the Social Security tax that is taken from an employee’s paycheck and also paid by the employer. 

The way the Social Security tax works is that 6.2% is deducted from an employee’s paycheck. That same amount is also required to be paid by the employer, making a total of 12.4% sent to the IRS. A payroll tax cut would mean that employees and employers would be exempt from paying this tax during the set “holiday” period, potentially making your paycheck larger (though there’s a catch — more below).

How much money could I get from a payroll tax cut? 

Paychecks typically show the amount withheld for Social Security, which equals 6.2%. For example, an eligible worker making $938 every two weeks will take home a paycheck worth $1,000, or $62 more than usual. 

Who is eligible for the payroll tax holiday?

The only requirement specified in the executive memo is that you earn no more than $4,000 every two weeks under the latest IRS guidelines. People who earn more than that will not be able to participate in the payroll tax holiday. It’s unclear how Trump’s payroll tax deferment would affect self-employed workers and contractors who typically pay their Social Security taxes with their income taxes. 

Since it applies to employed people, the millions of jobless Americans will not be eligible for the payroll tax cut. 

When does the deferred tax period start and end? 

According to the executive memo, the payroll tax holiday starts on Sept. 1 and lasts until Dec. 31 — that’s a four-month period. 

Why do you have to pay back the payroll tax money you get?

The payroll “holiday” is a pause as it’s written, not a forgiveness of tax contributions. The executive memo does say Treasury Secretary Steven Mnuchin can decide to forgive the deferment, and the president said in recent press briefings he might forgive the debt if he gets reelected. 

In the latest guidelines, employers can either choose to defer the taxes for their employees or not. If they choose not to, then payroll taxes will be taken out of checks as normal. 

How do you pay back the deferred payroll tax? 

The IRS said in a memo dated Aug. 28 that employers who participate in the payroll tax holiday will then have to pay back the taxes starting in 2021. This will be done by deducting an additional payroll tax deduction on top of the standard deduction. To put it simply, more money will be taken out paychecks from Jan. 1 to April 30 in 2021 to repay the taxes owed. 

How will the payroll tax affect employers and employees? 

The ideal situation for employees is a bigger paycheck during the four-month holiday without having to repay the money in 2021. However, a more likely scenario is employers refusing to participate in the tax deferment. 

Garrett Watson, a senior policy analyst for the Tax Foundation, says the payroll tax holiday may give some employees more funds in the short term, but they will see receive less money in 2021. 

“Overall, it is likely that many employers will judge this deferral to be either too complex or impose too much potential liability on their end to be worth taking advantage of, mitigating much of the limited benefit of the deferral,” Watson said.

Is a payroll tax holiday definitely happening? 

Even though the president’s other executive actions are legally questionable in regard to whether they’re unconstitutional, the payroll tax holiday is within Trump’s executive powers, according to Jacoby. 

Senate Democrats appear to have found a way to possibly overturn Trump’s tax holiday. A letter sent on Sept. 2 to the Government Accountability Office (GAO) from Senate Minority Leader Chuck Schumer, a Democrat from New York, and Sen. Ron Wyden, a Democrat from Oregon, requests the office to determine if the guidance provided for the payroll tax holiday could be deemed a “rule.” Under the Congressional Review Act, Congress can disapprove a rule that’s already in effect, and if successful in this case, it could end the payroll tax holiday. 

“Implementation of this Treasury and IRS guidance will result in significant, material consequences for workers starting early next year — particularly lower and middle-income earners — whose employers elect to temporarily defer the employee portion of those payroll taxes,” the senators said in the letter. 

Schumer and Wyden requested the GAO respond to their letter by Sept. 22. 

How could the holiday impact Social Security funding? 

The president said in a press briefing on Aug. 12 that Social Security will receive funding from the General Fund, which is the country’s account to pay for the daily operations of the government. What happens after the holiday will seemingly depend on who wins the upcoming election. Trump said he would consider removing the payroll tax in January of next year. 

Senators from the Democratic party asked the Social Security Administration on Aug. 19 to analyze the implications of this permanent payroll tax holiday after Jan. 1, 2021, that the president suggested. The administration chief actuary Stephen C. Goss says in a letter on Aug. 24 if there is no replacement funding for that tax, then Social Security reserves would be depleted in the middle of 2023. 

Have there been other payroll tax cuts? 

In 2011 and 2012, Congress approved a 2% payroll tax holiday for Social Security. This was intended to keep the George H.W. Bush-era tax cuts while also providing more funds to taxpayers in hopes of stimulating the economy. The result was a $10 billion loss per month to Social Security. 

Here are more resources on the executive actions on student loans, halting evictions and unemployment benefits. We also have info on the status of the second round of stimulus checks, what the next aid package looks like and how negotiations are going between the Democrats and Republicans. 

Correction, Sept. 9, 1:30 p.m. ET: An earlier version of this story misstated that ADP won’t participate in the payroll tax holiday. It’s only users of its TotalSource services who won’t participate.