Trump’s payroll tax holiday starts today: how does it work?

An executive order signed by President Trump in early August provides a payroll tax holiday for American workers that can be started today.

With congressional leadership still negotiating the next stimulus package to provide economic relief during the coronovirus epidemic, Trump announced four executive orders in an Aug. 8 briefing.

The payroll tax holiday has the potential to put more money in the purse of workers, but it is only a temporary measure — and which can have negative consequences down the road.

After the tax holiday begins today, some confusion remains as to whether employers will participate or how the deferral will affect workers who are already feeling financial stress.

Forbes AdvisorCalculate your payroll tax savings under Trump’s executive order

Description of Trump’s payroll tax holiday

Trump’s executive order directs the Secretary of the Treasury to defer some payroll tax obligations.

Any employee who is paid less than $ 4,000 before taxes for a weekly pay period per week is eligible.

The deferral period is September 1 through December 31, 2020.

Typically, employees and employers pay half of the total 12.4% Social Security tax for each worker. But under the executive order, employers can choose to refrain from withdrawing 6.2% from employees for Social Security, but must still contribute their own share for each worker.

By Trump’s order, the deferred amount will not pay penalties or interest.

But guidance issued by the IRS on August 28 specifies that deferred payroll taxes must be repaid between January 1, and April 30, 2021. Any tax to be paid within that window will not be subject to interest and penalties. According to the declaration, employers can collect those penalties from their employees, if necessary.

Workers who increase their salaries this fall may double the Social Security tax from their salary to pay deferrals in early 2021. But due to the lack of guidance on how workers will be expected to pay deferred payroll taxes, it is expected that many employers will continue to withdraw taxes as usual during the holiday.

Do you have to pay deferred taxes?

The president has the authority to defer payroll taxes since he made a nationwide emergency declaration in March. In the event of an emergency, the Secretary of the Treasury may change taxpayer liability.

But it is up to the Congress to decide whether to permanently waive deferred payroll taxes.

Ron Whedon (D-OR), a member of the Senate Finance Committee’s rankings, said in a statement, “This fake tax cut … would be a big shock to workers who thought they were getting tax cuts when it only There was a delay. ” Trump’s executive order in August. “These workers will be hit with big pay down the road.”

Chances are Trump’s move to defer payroll taxes will face some pushback, even when implementation begins.

Last month, The US Chamber of Congress and more than 30 business groups signed a letter expressing disappointment over unclear guidance for payroll tax deferrals and urged the White House and Congress to waive deferred taxes. The letter states, “Under a simple referral, employees will be stuck with a large tax bill in 2021.” “Many of our members did injustice to employees to decide that they would impose a large tax bill on them next year.”

Potential long-term impact of payroll tax cuts

Trump has been a vocal supporter of payroll tax cuts.

“If I emerge victorious on 3 November, I plan to forgive these taxes and make a permanent cut in the payroll tax,” he said when he signed his executive orders on 8 August.

But a payroll tax cut would increase the wages of workers, it only helps those who are currently working. The national unemployment rate is 10.2% after reaching a peak of 14.7% in April.

Opponents of payroll tax deferral say that it is not enough to extinguish the American economy at a time when so many people are unemployed. While a small increase will be seen in people earning a paycheck, it is unlikely that the car will not match the amount received through one-time cash payments, like the economic impact payments authorized by the Act.

And it is unclear how Trump would plan to fund Social Security without payroll taxes. “The payroll tax goes to the programs that Congress promised the American people,” said Richmond School of Law professor Carl Tobias.

If payroll taxes were abolished without a new source of funding for Social Security, the fund could be liquidated by mid-2023, according to a recent letter from Social Security chief executive Stephen Goss to Senate Democrats .

The last time Americans received payroll tax cuts was in 2011, when the Obama administration reduced employee payroll taxes by 2%. The unemployment rate that year hovered in the 9% range, in the wake of the Great Recession.