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Should you stop withholding payroll taxes?

It’s a fair question. When the White House announced a payroll tax holiday, the hope was that it would result in larger paychecks and boost the economy. However, the president doesn’t have the authority to cut payroll taxes on his own, so the tax holiday only suspends the tax. It will still be owed later.

Therefore, if you stop withholding payroll taxes, your employee, and possibly your business, could end up with a large tax bill in 2021. That is on top of the complex accounting that would be required in the meantime.

Recently, the U.S. Chamber of Commerce said in a statement that the president’s executive actions, though “well intentioned,” were “no substitute for congressional action.”

According to a research note by JPMorgan Chase, however, if every business in the U.S. deferred the collection of payroll taxes for the rest of the year, it would add $40 billion per month to the American paycheck.

That sounds like it might really help the economy. However, since it doesn’t reflect any actual reduction in tax liability, the effect of the program would be to give $40 billion per month in zero-interest loans to employers and employees.

A spokesperson for Walmart said that it would not yet decide whether to implement the tax holiday. “We’re awaiting guidance from the U.S. Treasury Department on the payroll tax deferral, and we’ll make decisions on implementation once that’s been provided.” Walmart is the nation’s largest private employer.

Some employers are hoping that the payroll tax will ultimately be forgiven. Working under the assumption that it would be, they are considering continuing to withhold the tax but repaying workers later. Unfortunately, that tends to defeat the stimulating effect of the tax holiday.

Would it really boost the economy?

Some economists worry that the payroll tax deferral isn’t a good way to boost the economy, in any case. For one thing, it gives the extra money to people who are still employed, and they may not need to spend it immediately. For another, it could scare seniors into saving money rather than spending because they fear the government will reduce Social Security benefits to make up for the unpaid taxes.

It could cost you administratively

Since the payroll tax rate doesn’t usually change in the middle of the year, most payroll software programs aren’t set up to change withholdings. That means that stopping your withholdings could require some programming or other technical work-arounds. That could potentially be expensive.

All in all, you will have to weigh the costs and risks against your perception of the benefits.