Credit unions confounded by Trump’s payroll tax order
As if a pandemic and economic uncertainty weren’t enough, credit unions are now faced with another uncertainty: whether or not to collect payroll taxes from employees and what impact that decision might have on those staffers next year.
Earlier this month President Trump signed an executive memorandum that included a measure allowing employees to defer paying payroll taxes for the last four months of the year. The move is meant to help stimulate the economy and put money back into the pockets of workers who are struggling as a result of the coronavirus.
But a number of concerns need to be addressed before employers, including credit unions, can make decisions about the change, experts said. Beyond that, there are questions about how much the tax deferment will bolster the economy.
“From the employer standpoint, credit unions don’t want to not withhold a tax if it will be a burden on employees to have a balloon payment down the road,” said Carrie Hunt, executive vice president of government affairs and general counsel at the National Association of Federally-Insured Credit Unions. “The goal is to put the employee in the best possible situation and we don’t want there to be unintended consequences.”
The executive order, which Trump signed on Aug. 8, applies to the 6.2% tax employees pay for Social Security and only affects those with a biweekly income of $4,000 or less, which would be a salary of $104,000 per year.
That extra money could help those workers and their families struggling at the margins, experts said. Those who make the maximum salary eligible for the deferment would see an extra $248 in their paychecks every two weeks.
“That certainly would put a few more dollars into everyone’s paycheck,” said Jon Hehli, chief financial officer at Royal Credit Union in Eau Claire, Wis. “That would be a 6% raise for a few months and that, in essence, should help economic activity.”
Delinquencies at the $3.2 billion-asset credit union are currently at an all-time low, Hehli said. The institution had roughly $4.9 million in delinquent loans through the first six months of the year, according to call report data from the National Credit Union Administration. That’s down roughly 56% from the same period a year earlier.
Part of the drop in delinquent loans can be attributed to members taking advantage of payment deferrals and the fact that unemployment has remained relatively low in the markets the credit union serves, Hehli said. Additionally, Royal didn’t loosen its lending standards during good economic times, meaning it should have fewer credit issues now, he added.
However, that’s likely to change as loan payment deferrals end, and management expects charge-offs to rise in 2021 and 2022, Hehli said. Royal reported about $10.2 million in charge-offs through June 30, up about 68% from the same period a year earlier, according to NCUA data.
“It just depends on how long people are out of work,” Hehli added.
Still, many employers haven’t been excited about the plan for deferring employee payroll taxes. More than two dozen associations, including the National Retail Federation, U.S. Chamber of Commerce and National Restaurant Association, sent a joint letter this week to Treasury Secretary Steven Mnuchin, House Speaker Nancy Pelosi and Senate Majority Leader Mitch McConnell urging a tax-relief plan “without the uncertainty associated with the recent payroll tax executive order.”
The groups were concerned about workers being required to repay the money in 2021. For instance, employees who earn $35,000 annually would owe roughly $751, according to the letter. That could be a burden for workers who live paycheck to paycheck.
As a result, many members of the organizations behind the letter would decline to participate in the tax deferment and would continue to withhold the taxes, according to the letter. Instead, the groups urged forgiving the taxes entirely.
“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 letter said. “It would also be unworkable to implement a system where employees make this decision.”
Experts said that the Treasury Department needs to issue guidance to address a number of concerns. For instance, the law requires that employers withhold payroll taxes from workers’ paychecks, said John Bredehoft, an employment lawyer at Kaufman & Canoles who works with credit unions.
Trump’s executive order did not alleviate that legal obligation. Without guidance from the Treasury Department, credit unions could be breaking the law if they stopped withholding the taxes, though Bredehoft didn’t believe the government would take action against any employer over the issue.
“It’s fair to say credit union clients have adopted a wait-and-see attitude,” Bredehoft said.
Credit unions and other employers are also looking for guidance regarding what happens if taxes aren’t withheld and a worker subsequently takes another job, as well as who is responsible for collecting those taxes.
Who gets to decide — the employer or the worker — whether to stop withholding the taxes is another point of contention. The American Institute of Certified Public Accountants has argued that it should be employees’ decision since they will be the ones responsible for paying the taxes back, said Ed Karl, vice president of taxation for the group.
But setting up a system for every employee to make an election could create logistical headaches, especially since the deferment will begin in less than two weeks.
“There is no way to understand how to apply the rule without getting guidance from the Treasury Department,” Karl said. “That would have to come out before Sept. 1 to implement it on Sept. 1. Then there is the question of how long in advance of Sept. 1 is the guidance needed for employers to be able to apply the rule.”
Finally, there are concerns about how effective the tax deferment will be at stimulating the economy. For one, the plan only helps Americans who currently have jobs and does nothing for those who are still out of work, experts pointed out.
“It isn’t a terrible idea,” Bredehoft said. “The volume of dollars that would be deferred for any individual family is not that great.”
Finally, other efforts meant to bolster the economy, such as sending stimulus checks to Americans earlier this year, didn’t necessarily have that effect. Instead, many Americans put that money away in checking and savings accounts, and as a result, the industry has seen deposits soar. Savings balances during the first six months of this year increased almost threefold over the growth posted for the same period in 2019, according to data from Callahan & Associates.
“As we have seen with the stimulus checks, the bulk of members have stored it away for uncertain times,” Royal’s Hehli said. “They didn’t know where COVID is going.”