What is Trump’s payroll tax holiday and how will it affect you? Everything you need to know
Amid a standstill in Congress over a fresh round of stimulus, President Trump issued several executive orders over the weekend to fast-track some economic aid initiatives to deal with the continued fallout from the coronavirus pandemic. One key order is a so-called payroll tax holiday—which would put a moratorium on paying certain payroll tax until next year.
The order has already been met with a lot of criticism, including that the tax deferral wouldn’t help the people who might need it most who have lost their jobs and aren’t currently paying payroll tax. Meanwhile, there’s a catch: the order is only a deferral of the taxes, so it won’t forgive them—as things stand, you’ll have to pay the taxes later.
“It is far from clear that the payroll tax holiday will achieve its intended objective of, as the president said, ‘save American jobs and provide relief to the American workers’,” Bankrate.com senior economic analyst Mark Hamrick said in a note Monday. “The bill is still due, it just isn’t due in the short-term. Let’s remember it is the unemployed who need help, not so much Americans who are still working and who’d get the benefit.”
What is the payroll tax holiday?
Under the order, if you take home less than $4,000 every two weeks (or less than roughly $104,000 a year), you wouldn’t have to pay certain payroll tax from September 1 through December 31 this year. For pay periods that are not bi-weekly, the memorandum notes it’s the same for an “equivalent amount.” In theory, that could save you up to 6.2% per paycheck that usually goes to Social Security as part of the 7.65% in payroll taxes both the employee and employer pay (including 1.45% for Medicare).
Via the order, President Trump is instructing the Treasury Department to “allow employers to defer payment of the employee portion of certain payroll taxes.”
Since the order is only to defer payroll taxes until next year, companies—and by extension their employees—would still be on the hook for paying the taxes back. Those like Glen Birnbaum, a CPA based in Illinois, believe this might also be an “administrative challenge” for payroll companies, employers, and employees—he suggests there would likely have to be changes (adding “new lines”) to W-2s to account for the wages earned during the deferral period, and that it could even potentially mean “a delay to when tax season starts, [although] it’s kind of crazy to say that on August 10,” he tells Fortune.
Meanwhile, others like Ed Zollars, a CPA based in Arizona and lecturer for Kaplan Financial Education, point out more practical issues: “If the employer isn’t going to withhold it, how would the employees pay back the balance they owe? Would it be on their 2020 Form 1040 or would there be some other mechanism?” Zollars told Fortune via email.
Still, as some have noted, the order may be “just a way to get Congress to act because it’s just going to be an administrative challenge if we really have to implement this stuff starting September 1,” Birnbaum suggests.
What does the payroll tax holiday mean for your paycheck?
In the simplest terms, the holiday means you wouldn’t have to pay payroll taxes through December. Based on how much you make, the holiday could theoretically save you as much as over $2,000 spread across those four months. President Trump claimed in a press briefing Saturday that “This will mean bigger paychecks for working families,” while White House economic advisor Larry Kudlow recently estimated on CNN’s “State of the Union” it would be “about a $1,200 wage increase after tax” (based on an annual salary of roughly $60,000). However, it’s important to remember two things: it’s not a true tax cut, and you’ll still owe taxes once the “holiday” is over after December—plus, it might not automatically trickle down to employees’ paychecks either.
For one, Birnbaum notes the obvious: “If they give their employees this money and later on they have to pay it back, does it help much?”
To that end, President Trump said at a press briefing alongside the announcement that, “if I win [the election], I may extend and terminate. In other words, I’ll extend it beyond the end of the year and terminate the tax.” The text of the order itself urges the Treasury to “explore avenues, including legislation, to eliminate the obligation” to pay it back. But experts note that won’t happen without going through Congress (it’s not in the president’s power to terminate taxes sans Congress).
But there’s another problem: Several experts point out that companies won’t be keen to take a chance and payout the money they would otherwise withhold for payroll taxes because they don’t want to risk the money not being forgiven.
In an op-ed for the Washington Post on Monday, Daniel Hemel, a law professor at the University of Chicago, wrote that because forgiveness of the taxes is such a big if, “Employers therefore have every reason to worry that if they stop withholding payroll taxes now, they’ll face a large bill come January. As a result, many will continue to withhold, which means their workers won’t see the boost in take-home pay that Trump has touted.”
In short, there’s a chance employees might not see the cash at all.
Zollars, for one, wonders if employees who “don’t want to risk having to pay up” will be able to opt out, or if companies who are nervous about “being stuck” with the bill will be able to keep withholding anyway.
Indeed, Birnbaum points out that “companies will be very resistant to changing normal payment protocol without more guidance,” and that “either they continue to remit the employee payroll taxes to [the Department of Treasury] as per usual or they don’t withhold and it is in effect paid to the employees.” He adds: “I think it’s the last thing that somebody is going to want, it’s a last resort.”
Who will benefit the most?
In President Trump’s memorandum, the payroll tax holiday would “put money directly in the pockets of American workers and generate additional incentives for work and employment, right when the money is needed most.” But it’s not quite as simple as that.
Employers were already able to defer some payroll taxes through 2021 via the CARES Act, but because of the concerns around liability of paying the taxes back, Birnbaum, for one, notes he hasn’t seen many businesses taking advantage. And as several experts including Birnbaum point out, it’s possible the holiday won’t be felt by employees.
Meanwhile, The Center on Budget and Policy Priorities has also argued the largest benefits of a payroll tax cut would go to those who make more money (or, in this case, those making the maximum some-odd $104,000 per year) versus those with lower incomes.
And for CPAs like Birnbaum, questions still remain around how the holiday would work for self-employed individuals or those with multiple jobs.
But the big kicker: a payroll tax holiday won’t help the some 16.3 million people unemployed right now.
Is the payroll tax holiday legal?
This is where things get a little (more) tricky.
Experts have pointed out that it’s legal for the president via the Treasury secretary to defer tax collection for one year in the event of a disaster, as Fortune also recently reported. However, for the taxes to actually be forgiven and not just deferred, Congress would likely need to pass legislation. Plus, it’s unclear whether the president would be able to require businesses to actually give back the withholdings to their employees.
Adds Bankrate.com’s Hamrick: “Whether the president’s orders help motivate lawmakers to act or give them the false impression that immediate action isn’t needed, remains to be seen.”