The Impending Social Security Tax Suspension Causes Mass Confusion

• Author: Chris Remington
• Posted: 2024-09-02

If you are an American employee, you have likely heard that President Trump has issued an Executive Order that suspends the collection of payroll taxes. Putting aside the impact that it would have on the long-term health of Social Security, there are numerous reasons why you should neither be celebrating nor spending the extra money. You may not even see anything extra in your paycheck at all. Certainly, this will not happen imminently. Regardless of the legality of the Executive Order, there is no certainty that this is going to help workers in any way.

The Executive Order that suspended collection of the payroll tax was not legislation passed by Congress. Only Congress has the ability to change tax policy. The Executive Order recognized as much because it was done in the form of a suspension of collection. It is not a full-fledged cut because it was not legally able to take away your obligation to pay taxes.

Companies Have No Idea What to Do Right Now

First, the payroll suspension only applies to people making under $100,000 annually. While this is a very large proportion of the population, there are many who are not covered by the Executive Order.

Second, many employers will continue to withhold Social Security taxes from their employees' paychecks. The form and format of the Executive Order places employers in a precarious position. The taxes are still due, albeit at the end of the year. The Executive Order was written in a way to pressure Congress to make the payroll tax suspension law. If Congress would not act, employees would owe a large debt to the federal government at the end of the year. President Trump was guessing that no Congress would allow people to face their own fiscal cliff at the end of the year with Social Security taxes due.

The problem for employers is if they fail to collect taxes from some employees who ultimately end up leaving the company before the bill comes due. Companies fear that they may get caught having to pay back the money to the federal government. As a result, many companies are not stopping their withholding of Social Security taxes. This means that the suspension will not put money in everyone's pockets.

Third, many companies will not even be ready for quite some time to implement the payrol tax suspension. It requires significant changes to payroll systems in order to accommodate a change of this magnitude. Many payroll providers are not able to do anything this complex in the middle of a quarter. Not only are employers struggling to implement the change, many are uncertain about the legal status of the taxes right now. Some companies simply have no idea what to do right now. They may opt to do nothing since it is a safer course of action.

Workers Could End Up Owing Thousands in Taxes at the End of the Year

Of course, there is still a chance that workers who have their payroll taxes cut will face a massive tax bill at the end of the year. Even companies that suspend tax collection may end up having to withhold significant amounts from paychecks to collect the taxes. The Executive Order's success would depend on Congress taking action to make the tax cut permanent, waiving collection of this money. There is no guarantee of that happening. Congress is definitely concerned about the future of Social Security, with the payroll tax suspension hastening the day that Social Security becomes insolvent. However, not doing something to cancel the payroll tax debt could amount to a tax hike on millions of Americans when they are struggling financially.

We may end up with a situation where some employers suspend payroll tax collections while others do nothing. The widespread confusion and risks of being stuck with a large tax bill are creating chaos. There is the real chance that different companies will address this differently and no money will flow down to taxpayers.

The truth is that there is no substitute for bipartisan legislation from Congress that can help taxpayers. In the meantime, anything else is likely to be a half-measure that cannot help many people due to the confusion and uncertainty. In other words, an Executive Order will not really help the economy. If it does, it will come at the cost of keeping Social Security solvent for as long as possible.