Broker Check
Making Sense of the Payroll Tax Executive Order

Making Sense of the Payroll Tax Executive Order

| August 18, 2020
Share |

Why you need to be careful not to start spending your payroll tax money

After negotiations for another stimulus bill stalled for two
weeks, President Trump issued an executive order
suspending the collection of Social Security payroll taxes
from September 1st through December 31st, while hinting
that it might go beyond that time frame too. It would impact
those making less than $4,000 for any bi-weekly pay
period or about $104,000 annually.

While the left and many on the right were not fans of the
payroll tax cut for lots of reasons, there is one very real
pitfall that might come into play later, including that the
deferred taxes might have to be repaid.

Whether you agree or not with the executive order,
however, if you have a paying job – and there are still
roughly 18 million unemployed and 30 million collecting
unemployment benefits – then your paycheck might be
bigger for the rest of the year.

Social Security Taxes

As you likely know, every time you get a paycheck:

  • 7.65% of your wages are subtracted from your
paycheck and go to Social Security and Medicare
(6.2% for Social Security and 1.45% for Medicare).

  • Your employer pays the same amount of tax.

President Trump’s executive order halts the Social
Security portion of your ordinary payroll taxes (6.2%).

How Much Money?

Here are a few quick examples:
  • If you make $10/hour and work 40 hours/week, you
will keep about $25 more per week or $446 from
September 1st through December 31st
.
  • If you make $15/hour, you will keep about $37 more
per week, or $670 from September 1st through
December 31st
.
  • If you make $25/hour, you will keep about $62 more
per week, or $1,116 from September 1st through
December 31st
.
Critics of the Payroll Tax Cut

As with all things in Washington, everything gets criticized.
There are those that say the money won’t be available
quickly enough and would prefer straight stimulus
payments. Others worry that the payroll tax cut only helps
those that have a job and the ones that don’t have a job
need the help more. Then of course there is the worry of
bankrupting Social Security, a perennial issue no matter
what side of the aisle you support.

But Before You Spend Your Tax Cuts

If you are in line to benefit from the President’s order, you
need to remember that it only suspends Social Security
taxes versus making them go away forever. In order for
that to happen, Congress would have to agree – and that’s
a tall order.

Yes, the President has said he’s looking into the possibility
of eliminating the suspended taxes if he’s elected, but
wiping your tax-suspension-slate clean might not be
possible (and of course he might not be elected). Further,
there are likely to be some companies that simply decide
to continue withholding so that they aren’t faced with a
really large bill later on.

As such, those impacted by this executive order need to
think about the impact to their cash flow today as well as
toward the end of the year.

Share |