If you’re already imagining how you’ll spend the extra money you could see from a payroll tax break, not so fast.
With Congress deadlocked over the next stimulus bill, President Trump issued a series of four orders that included a suspension of payroll taxes for workers who earn about $104,000 or less from Sept. 1 through Dec. 31.
For most employees, payroll taxes amount to 7.65% of their earnings: 6.2% up to $137,700 of earnings goes to Social Security, and 1.45% goes to Medicare no matter how much you make. If you earn more than $200,000 or $250,000 if you’re married, you pay an extra 0.9% Medicare tax.
While getting a bigger paycheck sounds good, it’s unclear whether workers would actually get that extra money.
5 Questions About the Payroll Tax Cut
Employers, employees, even tax experts have a lot of questions about the payroll tax cut, which as of right now is just a payroll tax suspension. Here’s what we still don’t know.
- Will we have to repay it?
The president can defer tax collection when a disaster has been declared, but for a tax cut to occur, Congress must pass it into law. Lawmakers on both sides of the aisle have slammed the idea of cutting payroll taxes, in part because it won’t help the millions of people whose unemployment benefits have been cut.
While Trump’s order could pump up the paychecks you earn between Sept. 1 and Dec. 31, unless Congress approves a payroll tax cut, assume you’ll have to pay the money back.
- Assuming Congress doesn’t enact a payroll tax cut, when would we have to pay back the money?
Trump has the authority to defer taxes by up to a year, but his order doesn’t specify a deadline for repaying the taxes if necessary.
It also isn’t clear how employees would pay back taxes. For example, would you have to pay it back using Form 1040 on April 15? Or would your employer have to start withholding more money from your paycheck come January?
- Would employees be able to opt out?
Since we’re assuming we’ll have to pay back the taxes until Congress tells us otherwise, it seems easiest to tell your employer to keep withholding payroll taxes on your behalf. But it’s still unclear whether employees will be able to opt out of the payroll tax deferral.
- Will businesses continue holding onto payroll taxes?
Implementing changes to withholdings will be complicated for businesses. Plus, many businesses are worried that they could be on the hook for money their employees owe.
Seth Hanlon, a senior fellow at the Center for American Progress who focuses on federal tax and budget policy, told U.S. News and World Report: “It’s totally unclear how employers are going to react to this, but it’s totally possible that employers will just decide to keep on withholding as normal.”
Obviously, if employees don’t see a boost to their paychecks, the tax deferral will do nothing to stimulate the economy.
- What’s the long-term effect on Social Security?
If this remains a payroll tax deferral, rather than a payroll tax cut, the Social Security trust will get the money it’s owed, or at least most of it.
But the bigger question is what happens if Congress does come around and approve a payroll tax cut? While Treasury Secretary Steven Mnuchin has said Social Security would be reimbursed using general funds — which is what happened when the Obama administration temporarily cut payroll taxes by 2 percentage points in 2011 — using general funds would also require congressional approval.
What Does This Mean for My Paycheck?
Until the IRS issues guidance on how businesses should handle payroll tax withholdings, it’s pretty likely that your employer will hold onto that cash.
But even if you do get the extra money, plan to pay it back unless Congress passes a tax cut into law. Have your employer continue withholding the money if that’s an option.
If it isn’t? Save it, don’t spend it. Put it in your bank account and don’t touch it until you send it back to the IRS.
Robin Hartill is a certified financial planner and a senior editor at The Penny Hoarder. She writes the Dear Penny personal finance advice column. Send your tricky money questions to [email protected]