What Trump's Payroll Tax Cut Will Mean for You

After negotiations for another stimulus bill broke down, President Trump issued a series of executive orders to help financially distressed Americans. One of the executive orders (actually an executive "memorandum") suspends the collection of Social Security payroll taxes from September 1 until the end of the year for workers making less than $4,000 for any bi-weekly pay period (that's $2,000 per week, or $104,000 per year).

There are plenty of lawmakers on both sides of the aisle who don't favor a payroll tax cut (or deferral). It's not enough and doesn't benefit people who need help the most, they say. Many private employers have also failed to follow the order.

Nevertheless, the president wanted a payroll tax cut for months – and now he finally has one (sort of). As a result, if you make less than $104,000 per year, your paychecks could be a little bigger for the rest of 2020 (assuming your employer complies with the president's order). But think twice before spending the extra money – you'll just have to pay the tax next year.

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How Much Money Will a Payroll Tax Save You

Every payday, 7.65% of your wages are subtracted from your paycheck to fund Social Security and Medicare (6.2% for Social Security; 1.45% for Medicare). Your employer pays an equivalent amount of tax (although employers already can defer payment of their share of Social Security taxes on wages paid through the end of the year). For 2020, the Social Security tax is only levied on the first $137,700 of earnings; however, an additional 0.9% Medicare tax is collected on wages over $200,000 for the year.

Under the president's executive order, your share of Social Security taxes (6.2%) won't be taken out of your paycheck if your pre-tax bi-weekly salary is $4,000 or less. So, for example, someone making $10 per hour and working 40 hours per week will get about $25 more per week, or around $100 per month. From September through December, that will add up to about $446. A full-time worker making $15 per hour would get approximately $37 more per week, $149 more per month, and $670 by the end of the year. For someone making $25 per hour, the savings will be about $62 per week, $248 per month, and $1,116 through December.

Since the executive order doesn't apply to bi-weekly wages above $4,000, the maximum tax deferral is $124 per week, which would add up to $2,232 from September 1 to December 31. (That's based on 40 hours per week at $50 per hour.) The $4,000 cap also means that the $137,700 wage base limit for Social Security taxes doesn't come into play.

Since the goal is to quickly get more money into the economy, critics claim that the infusion of cash into the economy will come too slowly from a payroll tax deferral. Instead, many lawmakers and experts would prefer another round of stimulus checks to get more money, more quickly into consumers' hands.

Who Would Not Get a Tax Break

Obviously, you have to get a paycheck to benefit from a payroll tax cut. So, if you're unemployed, retired, a stay-at-home parent, or don't have a job for some other reason, then the payroll tax holiday won't help you. This is one of the chief concerns among Democrats (and some Republicans), who believe the people who need support the most aren't helped by a payroll tax cut. Many of them would rather see expanded unemployment benefits and assistance to state and local governments instead.

Impact on Social Security

There's also concerned about the impact on the Social Security trust fund, which is already dealing with financial issues. Since payroll taxes fund Social Security, many people are worried 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 won't 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. That would likely add more to the nation's debt, though.

Potential Problems with the Executive Order

The executive order only defers Social Security payroll taxes – it doesn't eliminate them. The tax will have to be withheld and paid gradually from paychecks issued between January 1, 2021, and April 30, 2021. It would take Congressional action to actually wipe out the tax debt.

Mnuchin has also acknowledged that the president's order doesn't force businesses to stop withholding the tax. As a result, many private employers continue to withhold Social Security payroll taxes from their workers' paychecks. In fact, the U.S. Chamber of Commerce and 32 other U.S. business organizations said that "many of our members will likely decline to implement deferral, choosing instead to continue to withhold and remit to the government the payroll taxes required by law." That means no bump in workers' take-home pay. (Federal government employees in the executive branch – including military personnel – will have their Social Security payroll taxes deferred until 2021.)

The president's order also directs the Secretary of the Treasury to "explore avenues, including legislation, to eliminate the obligation to pay the taxes deferred," and Trump said he would "terminate" the suspended taxes if he's re-elected. But at this point there's no telling if the eventual payment of the deferred taxes will ultimately be avoided.

Should You Spend the Extra Money?

What should you do if your employer stops withholding Social Security taxes from your paycheck? Our advice is to put that money aside for now. While it's possible Congress will eliminate the tax debt, that doesn't appear likely at this point. If there's no Congressional action, then the deferred taxes will be taken out of your paycheck during the first four months of 2021.