Tax holiday: Next hot stimulus idea? Or big headache for you?
April 15, 2009 by Kerry IsbergPosted in: Employment law, In this week's e-newsletter, Latest News & Views, Money, Pay and benefits
A proposed tax holiday, if enacted, is bound to be popular with employees but not so popular with employers and recordkeeping people. Here’s why.
While some workers would receive fatter paychecks because, under the proposal, they wouldn’t pay Social Security or Medicare taxes for six months (and their employers wouldn’t have to make matching deposits), Payroll could get stuck with a messy, tight timetable.
The bill, sponsored by Reps. Aaron Shock (R-IL) and Walt Minnick (D-ID), would apply to employers, and employees of companies with 50 or fewer workers. Similar holidays were proposed during recessions in 2001 and 2003, but ended up on the cutting room floor.
While the idea sounds good on paper (and every proposal is just a bit different), just about all tax holidays have several potential pitfalls:
1. Employers probably wouldn’t get enough lead time. The timeframe to implement a payroll tax holiday could rival the one given for the new COBRA premium subsidy program – a few months at best, because lawmakers want to get money back into Americans’ pockets fast so they can spend, spend, spend. However, employers use a wide variety of payroll systems and while some with simpler payrolls could implement changes in a few weeks, it would take others much longer – even months.
Plus, employers that don’t process in-house would be at the mercy of others. For instance, the companies relying on off-the-shelf software would have to wait for the manufacturers to provide software updates for all different versions of their products. Those using payroll service providers would have to wait for their vendors to design, code, implement and test complex system changes to accommodate the proposal. Tax-rate changes, for example, normally require a minimum of 30 to 60 days to implement, so it’s no wonder that more complicated changes can take longer.
Bottom line: Taking all these details into consideration, employers would need a minimum of three to six months to prepare for a tax holiday. Chances are, though, that lawmakers would push to make this particular stimulus happen faster.
2. Recordkeeping and reporting requirements would change. How would Payroll report Social Security and/or Medicare wages that aren’t subject to taxes? Would IRS change both the Form W-2 and 941? The agency might have to add separate lines for things like Social Security wages paid in tax holiday period, or exempt from tax; Social Security wages subject to tax; Social Security tips paid in tax holiday period, or exempt from tax; Social Security tips subject to tax; and Medicare wages/tips paid in tax holiday period, or exempt from tax.
IRS regs require employers to provide terminating employees a Form W-2 within 30 days of their request, so most tax form changes would have to be made immediately.
3. Potential for abuse. Unless lawmakers define exactly which types of wages qualify for a tax holiday (and that seems unlikely), there’s an opportunity for employees to artificially shift income into any time-based holiday period. For instance, say a tax holiday’s in effect for the third and fourth quarters of 2009. Someone entitled to a large bonus based on business results and normally paid after the first of the year might arrange to have the check cut at the very end of the fourth quarter to take advantage of the “tax free” status. Payroll might also field requests for advance vacation pay or commissions.
Right now, the payroll tax holiday is only proposed. But, with the economy still far from recovering, it could easily gain more support. We’ll keep you posted.
Tags: COBRA, IRS, medicare, social security
April 20th, 2009 at 9:57 am
Sounds messy, but I mean, 50 or fewer employees? That is somewhat manageable.
April 20th, 2009 at 10:02 am
I understand wanting to get money into people’s hands faster but it would be easier just to issue an additional refund on each person’s tax return based on the actual amount of FICA/Medi paid during the year or maybe a tax rebate after the 2nd quarter 941’s are filed based on the FICA/Medi already paid. Of course there would be less amounts refunded if the IRS used the last 2 quarters of the year because those that reached the FICA threshold would no longer be paying that tax anyway.
Either one of these methods would make it a lot easier on the employers and reporting agencies.
April 20th, 2009 at 3:05 pm
Correct me if I’m wrong, but aren’t Social Security and Medicare in at an emergency status right now? How can we get out of a hole by digging it deeper? There are an abundance of other options that make much more sense!
April 20th, 2009 at 3:52 pm
50 or fewer employees?? What would that accomplish? Most employers have more than 50 employees and it wouldn’t be fair to give a tax break to a select few just because they happen to work for a smaller employer?? All taxpayers deserve to receive the same treatment regardless of the size of the company they work for. We all pay social security and medicare taxes so why should the employees of larger companies have to subsidize the tax breaks given to employees of smaller companies?
April 20th, 2009 at 4:30 pm
I agree with ABW, but then the IRS would be responsible for billing that back to the Social Security system, if this is where the dollars are supposed to come from. It’s like taking a loan against your future Social Security payout.
I don’t know why we just couldn’t do that instead. I would certainly like the opportunity to make an informed decision to take a years worth of SS payments and deal with the consequences later if I knew what that consequence was going to be.
I agree with ABW that letting employers deal the mess in the systems is not necessary, but I agree with the govt, that SS is not a bad place to give people a boost.
April 20th, 2009 at 4:50 pm
I don’t understand the logic of the tax holiday applying to only those business with less than 50 employees. Aren’t employees who work for a company that employs more people just as deserving of a tax holiday?
April 21st, 2009 at 10:39 am
I’m trying to figure out the rationale for only small companies. Don’t we all need the tax breaks?
April 21st, 2009 at 1:27 pm
I agree with you as well, Sherri. There must be other options available that would serve the purpose equally well if not better than tapping into the Social Security and Medicare funding.
April 22nd, 2009 at 11:59 am
I believe the rationale to give the tax break only to small businesses is because they employ 85% of the labor force. Thus small businesses drive our economy by investing in their businesses and hiring new employees as their businesses grow. While, bigger companies seem to prefer using foreign labor force [h1bs or outsourcing to other countries] when they want to expand market share or increase profits That being said, it does seem rather unfair for the relatively 15% or more who would not get a tax break.
April 22nd, 2009 at 2:53 pm
Lewis,
I understand your rationale and agree with your assessment of large comapines, but it seems abitrary and capricious to pick 50 employees. What’s magic about that number? Why not 60 or 70? How about or 10 or 20? That being said, I don’t think this bill has a chance of passing, which is good news for HR because it would be one more thing that we would have to monitor and manage.
November 9th, 2009 at 10:55 am
I think ABW has the right idea.