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President Donald Trump’s payroll tax “holiday” created via an executive memo signed on Aug. 8 will take effect starting today. It’s a tax deferment that could give taxpayers more money with each paycheck for the rest of the year, but will need to be paid back.
A payroll tax break has been on Trump’s radar as a form of coronavirus aid, alongside a second stimulus check, enhanced unemployment benefits and eviction relief (which wasn’t renewed). The president’s unilateral directive on payroll taxes wasn’t part of the Senate’s HEALS Act proposal for the stimulus package and isn’t a key consideration in the stimulus bill debates between the White House and Democratic negotiators.
On Friday, the IRS sent out guidance for the upcoming payroll tax holiday going into effect Sept. 1. The agency’s guidelines say employers can either defer the taxes for the rest of 2020 or choose not to and continue to deduct taxes from paychecks as normal. If taxes are deferred, employers will need to then deduct additional funds from employees’ paychecks to pay back the amount owed starting Jan. 1, 2021 to April 30, 2021.
Here are the details you need to know about the payroll tax cut, including how long it lasts. (The duration may be shorter than you think.)
What is the payroll tax and how is it used?
A payroll tax is a tax on both an employer and employee that contributes to federal programs 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 the set “holiday” period, potentially making your paycheck larger (though there’s a catch — more below).
How much money could I get from a payroll tax cut?
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 under the latest IRS guidelines. 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 millions of jobless Americans will not be eligible for the payroll tax cut.
When does the deferred tax period start and end?
According to the executive memo, the payroll tax holiday starts on Sept. 1 and lasts until Dec. 31 — that’s a four-month period.
Why do you have to pay back the payroll tax money you get?
The payroll “holiday” is a pause as it’s written, not a forgiveness of tax contributions. The executive memo does say 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.
In the latest guidelines, employers can either choose to defer the taxes for their employees or not. If they choose not to, then payroll taxes will be taken out of checks as normal.
How do you pay back the deferred payroll tax?
The IRS said Friday in a memo that employers who participate in the payroll tax holiday will then have to pay back the taxes starting in 2021. This will be done by deducting an additional payroll tax deduction on top of the standard deduction. To put it simply, more money will be taken out paychecks from Jan. 1 to April 30 in 2021 to repay the taxes owed.
How will the payroll tax affect employers and employees?
The ideal situation for employees is a bigger paycheck during the four-month holiday without having to repay the money in 2021. However, a more likely scenario is employers refusing to participate in the tax deferment.
Garrett Watson, a senior policy analyst for the Tax Foundation, says the payroll tax holiday may give some employees more funds in the short term, but they will see receive less money in 2021.
“Overall, it is likely that many employers will judge this deferral to be either too complex or impose too much potential liability on their end to be worth taking advantage of, mitigating much of the limited benefit of the deferral,” Watson said.
On Aug. 18, more than a dozen national business organizations — including the US Chamber of Commerce, National Retail Federation and the National Restaurant Association — sent a letter to Mnuchin, saying the deferment could cause “serious hardships on employees” who would receive a large tax bill in 2021. They said they would prefer to continue withholding payroll taxes as required by law.
Pete Isberg, vice president of government relations for payroll processing firm ADP, said the federal government has yet to provide any guidance, making the September start of the tax holiday questionable.
“It’s unlikely that many employers will be able to make the programming changes by Sept. 1,” he told Fox Business on Aug. 26. “We’ve advised Congress and Treasury that anything like this normally requires at least six months for an orderly programming transition.”
Is a payroll tax holiday definitely happening?
Even though the president’s other executive actions are 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 themselves or the companies that handle payroll and human resources for employers that could make a case against this action for logistics reasons. Aside from that, there is little sign of any formal opposition to the holiday in terms of lawsuits.
How could the holiday impact Social Security funding?
The president said in a press briefing on Aug. 12 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 upcoming election. Trump said he would consider removing the payroll tax in January of next year.
Senators from the Democratic party asked the Social Security Administration on Aug. 19 to analyze the implications of this permanent payroll tax holiday after Jan. 1, 2021, that the president suggested. The administration chief actuary Stephen C. Goss says in a letter Tuesday if there is no replacement funding for that tax, then Social Security reserves would be depleted in the middle of 2023.
Have there been other payroll tax cuts?
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 executive actions on student loans, halting evictions and unemployment benefits. We also have info on the status of the second round of stimulus checks, what the next aid package looks like and how negotiations are going between the Democrats and Republicans.