Trump's payroll tax deferral is about to take effect — what it will mean for you
NEW YORK - The IRS issued long-awaited guidance on President Trump's payroll tax deferral last week, just four days before the executive measure is set to take effect, putting the onus of the financial break on employers.
Companies can stop withholding employees' payroll taxes beginning Sept. 1, but workers are still on the hook to pay the taxes by the end of April 2021. It only applies to individuals earning less than $104,000 annually, or no more than $2,000 per week.
The rules came about three weeks after Trump signed an executive action on Aug. 8 giving workers temporary tax holiday -- a move that he said would help households weather the coronavirus-induced economic recession.
Critics, including Democrats and some Republicans, have argued that temporarily pausing payroll taxes is an ineffective way to boost the nation's beleaguered economy because it does nothing to aid the millions of out-of-work Americans who are currently not receiving a paycheck.
“While the Chamber appreciates the promulgation of guidance confirming the optionality previously suggested by Secretary Mnuchin, we are concerned that many critical questions remain unanswered, making implementation a continuing challenge,” Caroline Harris, the vice president of tax policy at the Chamber of Commerce, said in a statement Friday.
Currently, all employees and employers pay a 6.2% payroll tax on wages capped out at $137,700. That money goes toward Social Security. Right now, an employee earning $50,000 per year would pay $3,100 in payroll tax. Workers also pay a Medicare tax of 1.45%.
WHAT TRUMP'S PAYROLL TAX HOLIDAY WOULD MEAN FOR YOU
Those taxes show up on your paystub as FICA, which stands for the Federal Insurance Contributions Act.
Deferring those payments for a four-month period will give Americans an average paycheck increase of about $1,200, according to White House economic adviser Larry Kudlow. The maximum boost that Americans could see is about $2,149.
WHO MIGHT BE ELIGIBLE TO RECEIVE ANOTHER CORONAVIRUS RELIEF PAYMENT?
Trump has indicated that he wants to "terminate" the tax so that workers are not required to pay back the money at a later point. But abolishing the debt requires an act of Congress, an all-but-impossible scenario with Democrats controlling the House.
Absent that, the Treasury Department's guidance indicates that after Jan. 1, companies will withhold taxes from paychecks in larger amounts so employees can pay back what they owe, meaning that millions of Americans could see a smaller paycheck in the first few months of 2021. The taxes are ultimately due by the end of April.
TRUMP SAYS SECOND STIMULUS CHECKS COULD BE 'WAY HIGHER' THAN $1,200
It's unclear what happens if employees stop working at their companies before the end of April, either because they quit their job or were laid off or furloughed. According to the guidance, companies can "make arrangements to otherwise collect the total applicable taxes from the employee."