The COVID-19 crisis has spurred a massive recession that's put small businesses in a terrible spot. Thousands have already closed their doors permanently in the course of the pandemic while those that have remained open have struggled with cash flow issues.
In late June, small business advocacy group The Main Street Alliance found that almost 60% of its members had to either delay or reduce their commercial rent payments over the previous four months. And with many small businesses still facing restrictions, the struggle to pay rent will likely continue.
But starting in September, President Trump's payroll tax break will begin to take effect, and while it's certainly not a perfect solution to the ongoing crisis, it could help pump cash into small businesses at a time when they really need it.
Will a deferred payroll tax help save small businesses?
All workers are subject to a Social Security payroll tax equal to 6.2% of their earnings of up to $137,700. (The amount of applicable wages for Social Security tax purposes changes yearly; that figure may rise in 2021.) Employers also pay a 6.2% payroll tax toward Social Security, effectively splitting that total burden with employees.
What the president's payroll tax holiday has done is suspend the employee portion of Social Security tax beginning in September through the end of 2020 for those with an annual wage of $104,000 or less. By letting workers pay less tax upfront, the goal is to boost employees' paychecks in the near term. The hope is that doing so will fuel economic growth and perhaps prevent additional small business closures or improve the financial picture of struggling businesses today.
Now to be clear, this payroll tax break isn't a permanent one. As of now, it's just a deferral, and any payroll tax not collected late this year will be due in 2021. And while President Trump has pledged to forgive this payroll tax deferral if reelected, he may not have the authority to do so. As such, the current tax holiday he's arranged is really just a Band-Aid solution to an overarching problem -- and it may not be enough to boost spending and save small businesses from additional shutdowns.
As such, Trump's payroll tax deferral may not be much of a boon to commercial landlords whose small business tenants are behind on rent. It also may not do much to prevent small business closures, which means commercial landlords may continue to grapple with vacancies.
A fairly ineffective means of stimulating the economy
While a paycheck boost might buy Americans some near-term peace of mind, the fact that their payroll tax obligation is not being wiped out for good may inspire them to continue to spend conservatively -- meaning, to not pump more cash into the local businesses that need it.
Let's also not forget that the president's payroll tax break is not the same thing as a stimulus. With the latter, a check comes in with no strings attached, so that money is free to be spent. The current payroll tax holiday is really nothing more than a glorified loan -- one that could wind up coming due at the worst possible time.
Therefore, while boosting Americans' income temporarily is a good idea in theory, in practice, it may not do a thing for small businesses -- or the commercial landlords that rely on them to keep paying rent.