President Donald Trump created a payroll tax holiday in early August to help Americans struggling financially due to the pandemic. The intent was for workers to start getting more money in their paychecks as of Sept. 1, but that won’t be the case for employees at some of the largest companies in the US.
UPS, CVS and Wells Fargo are part of the growing number of companies that won’t participate in the payroll tax holiday, according to a Sept. 11 report from The Wall Street Journal. It’s not just businesses that are opting out. The House of Representatives and the US Postal Service decided not to partake in the holiday. California, Arizona, Kansas and several more states also won’t participate.
Trump’s executive memo on Aug. 8 involved deferring, for workers making less than $100,000 a year, the 6.2% Social Security tax taken out of paychecks. The deferment would last from Sept. 1 to Dec. 31 and taxes would have to be paid back over the course of the first four months of 2021. House Republicans introduced a bill to forgive the deferred taxes, according to a report from The Hill. Trump said in multiple campaign speeches that he would forgive the taxes if he gets reelected, and there are discussions at the White House of him signing another executive action that the administration says would make the deferment more effective, as reported by The Washington Post on Sept. 9.
The payroll tax deferment was one of the four executive actions Trump signed on Aug. 8, with the other three involving what the administration referred to as enhanced unemployment benefits, an eviction moratorium and a continued deferral on student loan payments. The actions came as Democrats and Republicans continued to fall short of an agreement on the terms of a new stimulus package, which might include a second round of stimulus checks. That deadlock goes on, with a “skinny” relief bill floated by Republicans failing to pass the Senate.
Here are the details you need to know about the payroll tax deferment.
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 in a memo dated Aug. 28 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.
Is a payroll tax holiday definitely happening?
Even though the president’s other executive actions are legally questionable in regard to whether they’re unconstitutional, the payroll tax holiday is within Trump’s executive powers, according to Jacoby.
Senate Democrats appear to have found a way to possibly overturn Trump’s tax holiday. A letter sent on Sept. 2 to the Government Accountability Office (GAO) from Senate Minority Leader Chuck Schumer, a Democrat from New York, and Sen. Ron Wyden, a Democrat from Oregon, requests the office to determine if the guidance provided for the payroll tax holiday could be deemed a “rule.” Under the Congressional Review Act, Congress can disapprove a rule that’s already in effect, and if successful in this case, it could end the payroll tax holiday.
“Implementation of this Treasury and IRS guidance will result in significant, material consequences for workers starting early next year — particularly lower and middle-income earners — whose employers elect to temporarily defer the employee portion of those payroll taxes,” the senators said in the letter.
Schumer and Wyden requested the GAO respond to their letter by Sept. 22.
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 on Aug. 24 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.
Correction, Sept. 9, 1:30 p.m. ET: An earlier version of this story misstated that ADP won’t participate in the payroll tax holiday. It’s only users of its TotalSource services who won’t participate.