Here’s what the payroll tax deferral action means for you

The U.S. Treasury Department released guidance Friday evening informing companies and workers how President Donald Trump’s proposed tax holiday will apply to them.

Companies can stop withholding employees’ payroll taxes starting Sept. 1, although workers will have to pay the taxes by the end of April 2021. The new guidance, released together with the IRS, applies only to those whose bi-weekly paychecks are less than $4,000, the equivalent of $104,000 a year.

The guidance comes after Trump’s Aug. 8 executive action giving workers a tax holiday. It left open the possibility of forgiving the deferred tax later on.

But only Congress has the power to waive taxes, so all the president can do is postpone when they are due.

Although Trump’s action was signed weeks earlier, the guidance was delayed as the White House looked into whether it was possible to waive workers’ taxes entirely rather than deferring them to next year. The answer from the Internal Revenue Service was no, employees are still on the hook for paying their taxes next year.

It is up to the companies whether they will opt in to the payroll tax deferral. Many were waiting for guidance from the Treasury Department, but already a collection of business leaders have pushed back against the plan.

“Many of our members consider it unfair to employees to make a decision that would force a big tax bill on them next year,” the U.S. Chamber of Commerce and more than 30 trade associations wrote in an Aug. 18 letter to Congress and the Treasury Department.

“It would also be unworkable to implement a system where employees make this decision,” wrote the groups, adding many of their members will likely decline to defer the tax.

If companies take this approach and withhold taxes for employees starting Tuesday, the taxes will be deferred until Jan. 1. At that time, companies will withhold taxes from paychecks in larger amounts so employees can pay back what they owe.

It’s unclear what happens if employees stop working at their companies before the end of April, either because they have quit or have been furloughed. The IRS guidance says companies can “make arrangements to otherwise collect the total applicable taxes from the employee.”

Critics of Trump’s executive action say that it would defund Social Security and Medicare, two programs that rely on payroll taxes.

While the tax holiday could be a short-term boost to the economy, businesses and workers, it provides no help to the over 27 million Americans who are unemployed and have no payroll taxes to withhold.