President Donald Trump has long pushed the payroll tax cut as part of his personal wish list as another form of aid alongside a memorandum to defer payroll taxes for a number of months. He also signed executive actions to renew , and to look into .. On Aug. 8, he issued a
The payroll tax cut wasn’t part of thefor the and isn’t a key part of the between the White House and Democratic negotiators.
Here we take a close look at the president’s executive payroll tax cut action to break down what you really need to know about it, including how long it lasts (the duration may be shorter than you think) and if you’ll have to make up the extra tax in 2020 or 2021.
What is the payroll tax?
A payroll tax is a tax on both an employer and employee that contributes to a federal program such as Medicare or Social Security. In the case of Trump’s executive action, it’s referring to the Social Security tax that is taken from an employee’s paycheck and also paid by the employer.
The way the Social Security tax works is that 6.2% is deducted from an employee’s paycheck. That same amount is also required to be paid by the employer, making a total of 12.4% sent to the IRS. A payroll tax cut would mean that employees and employers would be exempt from paying this tax during a set “holiday” period, potentially making your paycheck larger (though there’s a catch — more below).
How much money could I get back?
Paychecks typically show the amount withheld for Social Security, which equals 6.2%. For example, an eligible worker making $938 every two weeks will take home a paycheck worth $1,000, or $62 more than usual.
Who is eligible for the payroll tax holiday?
The only requirement specified in the executive memo is that you earn no more than $4,000 every two weeks, for a maximum of $100,000 per year. People who earn more than that will not be able to participate in the payroll tax holiday. It’s unclear how Trump’s payroll tax deferment would affect self-employed workers and contractors who typically pay their Social Security taxes with their income taxes.
Since it applies to employed people, the 38 million jobless Americans will not be eligible for the payroll tax cut.
When will the payroll tax holiday start?
According to the executive memo, the payroll tax holiday will start on Sept. 1 and last until Dec. 31 — that’s a four-month period.
There’s a big catch: You might not get any extra money at all
Whether or not employees actually see a bigger take-home check isn’t guaranteed, even with the executive action in place. It’ll be up to employers to decide what to do with the excess funds: whether to give them to employees or hold onto them to pay back to the government sometime next year.
Why does the payroll tax money have to be paid back?
The payroll “holiday” is a pause as it’s written, not a forgiveness of tax contributions. The executive memo does say the Treasury Secretary, Steven Mnuchin, can decide to forgive the deferment, and the president said in recent press briefings he might forgive the debt if he gets reelected.
If that were to happen, it isn’t clear what, if anything, employers who held the money will be compelled to do with it, which likely won’t be answered until the Treasury Department provides guidance on the matter.
Garrett Watson, a senior policy analyst for the Tax Foundation, says there’s a lot of uncertainty on what employers will be required to do according to the Treasury Department and what they’re legally allowed to do according to state laws. California, for example, has strict laws stating that employers can’t withhold wages from an employee’s paycheck. Other states have different rules. Then things could potentially become messy if an employee leaves their jobs during this payroll tax holiday.
How do I pay back the deferred payroll tax?
That is still unclear. Much of the memo leaves the specifics of the payroll tax holiday to the Treasury Secretary. One possibility is that the taxes you owe would be incorporated into your 2020 income taxes.
But those receiving a paycheck aren’t the only ones needing to pay back these taxes.
“Employers are gonna have to come up with the money, one way or another,” said Samantha Jacoby, senior tax legal analyst at the Center on Budget and Policy Priorities. “They might take the entire deferred tax from one paycheck at the end of the year, for example, which would likely surprise a lot of people who think they got a tax cut.”
Is a payroll tax holiday a done deal?
Even though theare legally questionable in regards to whether they’re unconstitutional, the payroll tax holiday is within Trump’s executive powers, according to Jacoby.
It would be employers or companies who handle payroll and human resources for employers who could make a case against this action for some logistics reasons. Aside from that, there is little sign of any formal opposition to the holiday in terms of lawsuits.
How will the payroll tax affect employees and employers?
The ideal situation for employees is a bigger paycheck during the four-month holiday without having to repay the money in 2021. Less ideal: Workers could see no difference in their paycheck as their employers decide to hold on to the money.
As for employers, the best case scenario is for them to not pay the payroll tax either. Some could also make additional funds by holding on to their employees’ wages in an escrow account that can accrue interest. At worst, employers will have a large tax bill in 2021.
How would the holiday impact Social Security funding?
The president said in a press briefing Wednesday that Social Security will receive funding from the General Fund, which is the country’s account to pay for the daily operations of the government. What happens after the holiday will seemingly depend on who wins the .
Have there been other payroll tax holidays?
In 2011 and 2012, Congress approved a 2% payroll tax holiday for Social Security. This was intended to keep the George H.W. Bush-era tax cuts while also providing more funds to taxpayers in hopes of stimulating the economy. The result was a $10 billion loss per month to Social Security.
Here are more resources on the, and . We also have info on the status of the , what the like and how .