As payroll payments change due to changing work patterns, tax policies are also changing. President Trump signed a memorandum in early August that promised payroll tax relief across the workforce.
But given limitations to the authority of the executive branch, there was a catch: Instead of reducing or eliminating payroll tax, the policy ultimately gives employees the choice to defer their Social Security withholdings for the remainder of the year, then pay them in early 2021.
The legal question of whether a president has the authority to forgive or reject taxes so broadly has yet to be answered. While the executive branch hopes the policy may transition into forgiveness later, such consent seems increasingly unlikely. As a result, employees must decide whether the policy is worth it or not.
Though the tax deferral could have made an average of $500 per employee available in take-home pay, almost nobody will be able to take advantage of the well-intentioned policy. Tax deferrals put the onus on employees to make good on payments a few months later without reducing the tax burden.
For most employees, implementing reduced withholding just isn’t worth it. In addition to burdening employees, employers similarly see drawbacks to a payroll tax deferral. Faced with the potential need to chase down employees in 2021 to “pay back” money not collected in Q4 2020, many employers have decided against the hassle.
Fortunately, there are more meaningful ways for employers to impact employee well-being and bank accounts. As we continue arguing over the mechanics of payroll tax collection, workers face ongoing challenges in pay structure and schedule. Two out of three workers continue to be paid just once or twice each month due to the cost and overhead employers incur running payroll.
Of course, life doesn’t wait for the 15th or 30th days of each month; payroll calendars don’t cleanly line up with bill due dates for the average worker. Before today, the payday loan industry and overdraft industry existed largely to accommodate poorly aligned due dates. Collectively, these two industries suck tens of billions of dollars each year from low-income Americans in the form of predatory interests and fees.
Technology that gives employers and employees pay flexibility is now available. New apps allow employers to pay employees whenever they want — outside of the traditionally choreographed standard payroll process and without incurring major costs. Giving employees access to earned pay when they need it isn’t just a psychological benefit: From reduced reliance on overdrafts and late fees to avoiding interest on payday loans, the average person accessing on-demand pay saves over $100 each month or about $1,200 each year.
Enabling employees to receive earnings on a more convenient schedule empowers them to start saving. And when we encourage financial freedom and planning, our employees are less stressed at work and more productive.
Payroll deferral doesn’t appear to give meaningful relief to low-income Americans — but payroll flexibility can fill that gap and then some.
