The New Payroll Deferral/Tax Cut 

Recently President Trump issued a series of executive orders in an attempt to financially assist distressed Americans. Included was a deferral of payroll taxes.

The memorandum reads as follows:

Sec2. Deferring Certain Payroll Tax Obligations. The Secretary of the Treasury is hereby directed to use his authority pursuant to 26 U.S.C. 7508A to defer the withholding, deposit, and payment of the tax imposed by 26 U.S.C. 3101(a), and so much of the tax imposed by 26 U.S.C. 3201 as is attributable to the rate in effect under 26 U.S.C. 3101(a), on wages or compensation, as applicable, paid during the period of September 1, 2020, through December 31, 2020, subject to the following conditions:

(a) The deferral shall be made available with respect to any employee the amount of whose wages or compensation, as applicable, payable during any bi-weekly pay period generally is less than $4,000, calculated on a pre-tax basis, or the equivalent amount with respect to other pay periods.

(b) Amounts deferred pursuant to the implementation of this memorandum shall be deferred without any penalties, interest, additional amount, or addition to the tax.

Sec. 3. Authorizing Guidance. The Secretary of the Treasury shall issue guidance to implement this memorandum.

Sec4. Tax Forgiveness. The Secretary of the Treasury shall explore avenues, including legislation, to eliminate the obligation to pay the taxes deferred pursuant to the implementation of this memorandum.

Sec5. General Provisions. (a) Nothing in this memorandum shall be construed to impair or otherwise affect:

(i)  the authority granted by law to an executive department or agency, or the head thereof; or

(ii) the functions of the Director of the Office of Management and Budget relating to budgetary, administrative, or legislative proposals.

(b) This memorandum shall be implemented consistent with applicable law and subject to the availability of appropriations.

(c) This memorandum is not intended to, and does not, create any right or benefit, substantive or procedural, enforceable at law or in equity by any party against the United States, its departments, agencies, or entities, its officers, employees, or agents, or any other person.

(d)  You are authorized and directed to publish this memorandum in the Federal Register.

This suspends the collection of Social Security payroll taxes from September 1, 2020 until December 31, 2020 for workers making less than $4,000 for any bi-weekly pay period (which equates to $2,000 per week, or $104,000 per year). This means that if you make less than $104,000 per year, your net pay could larger for the rest of this year.

There are mixed feelings about this, as well as some confusion. Keep in mind that this year has been a year of rapid changes, so you will want to keep on a close eye on things. 

The first question many people ask is “how much will I save?”. 7.65% of your pay is subtracted for Social Security and Medicare tax (6.2% for Social Security and 1.45% for Medicare). Your employer pays an equal amount of tax on your wages. During 2020 the Social Security tax is levied on the first $137,700 of earnings and an additional .9% Medicare tax is collected on wages over $200,000. So, under this executive order your portion of Social Security taxes will not be taken out of your pay if your pre-tax bi-weekly pay is $4000 or less. 

Some examples of this are: You are making $10 per hour and work 40 hours each week. You will see a net increase in take home pay of about $25 per week ($100 per month). This will occur from September 1, 2020 to December 31, 2020, totaling roughly $446. Another employee makes $25 per hour and works 40 hours each week. This would net the employee $62 more each week and would come to approximately $1116.00 by the end of 2020.

For those who have bi-weekly wages above $4000, the maximum tax deferral is $124 per week, bringing the total for the year to $2232 (based on 40 hours per week, at $50 per hour). 

Some critics feel that the program falls short on quickly infusing money into the economy. They argue that another round of stimulus checks would be preferable to meet the goal of getting more money into the economy.

So, who qualifies for this tax break? In order to benefit from it you must be someone who receives a paycheck. Therefore, if you are unemployed, retired, a stay-at-home parent or do not have a job for any other reason you do not qualify.

Some critics express this as a chief concern. They feel that those most in need of help do not have a job and would prefer these funds go into the unemployment benefits.

It is very important to remember that this executive order defers, not eliminates, these payroll taxes. The order directs the Secretary of the Treasure to “explore avenues, including legislation, to eliminate the obligation to pay the deferred taxes”. Trump is quoted as saying he would “terminate” the suspended taxes if he is re-elected. 

For them to be eliminated it would mean that Congress needs to act. Due to this some employers may continue to withhold payroll taxes in order to avoid a large bill when the taxes become due. The president’s order does not force businesses to stop withhold this tax. At this time many employers are waiting for the IRS to issue guidance before making a decision. Many experts in finance recommend to employees to put the extra money aside until more is known.

There is also concerned about the impact on the Social Security trust fund, which has already been dealing with financial issues. Since payroll taxes fund Social Security, many people have concerns about the long-term effects of diverting money away from this social safety net for seniors.

Treasury Secretary Steven Mnuchin, however, says that Social Security funding will not drop. Money will be transferred from the federal government’s general fund to the Social Security trust funds to cover any payroll tax amounts not collected, according to Mnuchin. 

As is true of most things this year, everyone is encouraged to keep an eye out for updates and changes. 

References

https://www.whitehouse.gov/presidential-actions/memorandum-deferring-payroll-tax-obligations-light-ongoing-covid-19-disaster/

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