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Payroll Tax Deferral for Federal Employees Prompts Criticism

A government notice indicating that President Trump’s temporary payroll tax deferral will go into effect for federal employees sparked alarm from observers, who say the move may be illegal.

The Agriculture Department’s National Finance Center, which provides administrative services to federal agencies, stated in an August 21 notice that beginning with the first pay period after September 1, it will “eliminate the OASDI employee deductions” for employees earning less than $4,000 per pay period, while continuing to remit the employer portion of payroll taxes.

The notice goes on to say that employees who would ordinarily earn wages below that threshold, but whose wages in any given pay period exceed that amount because of working overtime related to COVID-19 or other circumstances would have their share of payroll taxes withheld.

The Agriculture Department, Treasury, and the White House didn’t respond to requests for comment.

Hold Up

The move comes before any guidance was issued by Treasury, which was charged by Trump’s brief August 8 memo with implementing the deferral.

“That is shocking and lawless, for several reasons,” Seth Hanlon of the Center for American Progress told Tax Notes.

According to Hanlon, the timing alone creates legal issues. Trump’s memo has no legal authority on its own, he said, and any legal authority there might be for the deferral rests with Treasury, which has yet to issue any guidance.

“Employers, including federal agencies, are still required to withhold Social Security tax. They would absolutely be breaking the law if they do not,” Hanlon said.

Samantha Jacoby of the Center on Budget and Policy Priorities agreed, remarking that she was surprised to see a federal agency take action before Treasury’s guidance was finalized. Federal agencies are going to face many of the same implementation challenges that private sector employers will deal with, and there are “necessary details” that remain unknown, like what happens when the deferral period is over, and what happens if an employee leaves in the middle of the deferral period, she said.

Hanlon also criticized the notice for seemingly applying the deferral across the board, despite Treasury Secretary Steven Mnuchin’s comments earlier in the month suggesting participation would be voluntary. “That would set up employees for a large, surprise tax bill next spring,” Hanlon said, adding, “It’s outrageous.”

And Jacoby said there will likely be “substantial confusion among federal employees,” who don’t appear to have any option to continue having their payroll taxes withheld, at least according to the National Finance Center notice.

What About Congress?

The notice acknowledges that Trump’s memo only provided for payroll tax deferral, not forgiveness, and that “Treasury should look to have legislation put in place so that employees do not have to pay back these deferred amounts.”

However, unless Congress passes legislation forgiving the deferred amounts, they will have to be paid back either by the agencies or the federal employees, observed Daniel Hemel of the University of Chicago School of Law.

If the former, that would create some additional logistical challenges, according to Hemel. Agencies almost certainly can’t pay their employees’ deferred tax debts on their own without additional appropriations and, most likely, without additional authorization from Congress, he said.

“If I were a federal employee, I wouldn’t be too quick to spend my extra money before I know who’s ultimately on the hook,” Hemel said.

For now, Hemel and others remain unconvinced that Congress will cooperate and pass legislation to forgive the deferred amounts.

The payroll tax memo leaves Congress with a “headache to sort out,” Hemel said. “The whole plan relies on the assumption that Congress will pass a patch — that assumption may prove wrong.”

David A. Super of Georgetown University Law Center noted that lawmakers have resisted White House pressure for a payroll tax cut since the pandemic began, and that they likely want to avoid emboldening future presidents from trying to “wrestle the tax policy-making away from them.”

Super also wondered if the seemingly mandatory payroll tax deferral was a response to widespread rejection of the deferral opportunity by business groups and practitioners. “This may have been the only thing they could do to ensure that the president’s action affected a significant number of people,” he said.

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