In August, Donald Trump signed an executive order allowing for a temporary payroll tax deferral. Ultimately, it allows for employees who earn less than $104,000 per year to defer their payroll taxes until April of next year.
The percentage that could be deferred, is 6.2%, or what employees pay toward Social Security tax. And while the deferral was supposed to go into effect on Sept. 1, as of Aug. 31, the Treasury Department had yet to issue guidance for employers and payroll companies. Although it’s not immediately clear when this may take effect, for the purpose of this blog, we’ll use a hypothetical start date of October 1.
When it comes to payroll tax (which includes Social Security and Medicare tax), employers and employees split the burden. The total Social Security tax is 12.4%, whereas the Medicare tax is 2.9%. What this means, is that the employer and employee each pay 6.2% and 1.45%, respectively—and—as we noted earlier, Trump’s proposal involved a Social Security tax holiday for individuals making less than $104,000 per year.
When the “holiday” goes into effect, individuals who earn $38,000 per year would see a temporary $181 per month income boost; those earning $48,000 per year would see a $248 boost, and employees who take home $70,000 per year, would receive an extra $362 a month.
The most important thing to keep in mind is that the payroll tax holiday is exactly that—a holiday. It does not exempt employees from needing to “pay back” the tax in the future.
To underscore this point, let’s say Jane, who earns $38,000 per year, and John, who earns $48,000 per year, take advantage of the payroll tax holiday from October 1 through January 1, (the date it’s set to expire.) In that three months, Jane would have taken home an extra $543, while John would have taken home an extra $744.
Once the holiday expires, their employers will need to hold taxes in higher amounts so employees can “repay” what they owe. Although it’s not immediately clear how that would work, what it does mean, is that people who opt into the payroll tax holiday, are likely to take home less money each pay period, starting in January of next year, until the “holiday deferral” is repaid to Uncle Sam.
The whole thing is extremely complex, and at current, there are lots of employers throughout the US who are reluctant to implement the payroll tax holiday because it will force a larger payroll tax on employees in 2021.
If you’re an employer and you have additional question about the payroll tax holiday and what this means for you and your staff, call our office today to speak with a tax professional.