The Payroll Tax Cut is Problematic

Trump’s Payroll Tax Cut will haunt tax payers on April 15th, 2021, in the form of a TAX BILL!

KR Franklin
Aug 19, 2020 · 5 min read
Payroll Tax Cut Payroll Tax Cut Payroll Tax Cut Payroll Tax Cut Payroll Tax Cut
Payroll Tax Cut Payroll Tax Cut Payroll Tax Cut Payroll Tax Cut Payroll Tax Cut
Photo by Capturing the human heart. on Unsplash | Payroll Tax Cut

On August 8th, 2020, the White House released a Presidential Memorandum: Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster. This memo is known as Trump’s Payroll Tax Cut.

Like any respectable memo, it begins by describing its purpose:

The language in the first section suggests the executive action aims to reverse disruptions in the US economy via policy changes. Using phrases like “sudden and unexpected” and “originated in the People’s Republic of China,” the White House begins the memo by shifting blame.

Blaming the COVID-19 devastation in the United States on China is political. However, what about the Payroll Tax Cut? Perhaps, the White House is trying to help ease the economic disruption through executive actions.

This assumption will be proven false. Subsequent sections of the memo will show something more ominous is in the works.

What are Payroll Taxes?

Payroll taxes are levies paid by US employers and employees. Each party pays an equal percentage of 7.65% to the Internal Revenue Service via payroll deductions.

Breakdown of Payroll Tax: 6.2% for Social Security and 1.45% for Medicare

The Federal Government collects the combined 15.3% through automatic paycheck deductions.

For example:

  • You earn $50,000 per year
  • Your annual contribution: $3,825 per year
  • Your employer’s contribution: $3,825 per year
  • IRS receives: $7,650 or 15.3% of $50,000

Self Employment Taxes

For self-employed professionals, payroll taxes go by a different name: The Self Employment Tax.

The Self Employment Tax is the same as the Payroll Tax, except self-employed individuals pay the entire 15.3%. They pay this money to the IRS in quarterly payments or a lump sum during income tax season.

It is unclear if Trump’s executive order provides relief to the self-employed.

Payroll Tax Cut vs Deferral

The first aspect in Trump’s Memo, revealing potential problems, is the focus on tax deferment and not a payroll tax cut.

What’s the difference?

A payroll tax cut permanently cuts your burden in paying payroll taxes. Tax deferrals delay your responsibility in paying the tax.

Meaning you’re still on the hook for your payroll taxes during a deferment — unless forgiven.

Notice the term “deferring” in the section title! Trump’s executive order is deferring your payroll taxes and not cutting them. Thus, the phrase “Payroll Tax Cut” is a misnomer.

Only Four Months of Relief

The other striking detail from section two is the tax holiday portion. If you guessed, the tax relief would last a year or more — you guessed wrong. The tax holiday, is in fact, shorter than most would expect. Almost like it was designed…

Entirely for the Presidential Election in November.

Moreover, the term for the tax holiday is explicitly outlined as September 1 — December 31, 2020; amounting to a brief four months of tax relief.

What does that mean for tax payers?

Tax Payer Example:

  • You earn $50,000 per year
  • You receive a bi-monthly paycheck from your employer
  • Payroll taxes of $159.38 per paycheck are deducted automatically
  • Total Tax Deferment After Four Months: $1,275
  • You still owe $1,275

Most people, in the above scenario, would make the mistake of spending the extra money in their paycheck and wouldn’t have the $1,275 to pay the IRS in April.

Who will be eligible?

The eligible recipients are those whose earnings do not exceed $4,000 during a bi-weekly period. Since there are 26 bi-weekly periods in a year, this amounts to someone who earns less than $104,000 per year (pre-tax).

There are no other restrictions or limitations in terms of eligibility.

Will Trump Forgive Your Payroll Tax Deferment?

The presidential memo does not outline any concrete steps for forgiveness. Instead, the notice defers that responsibility to the Secretary of Treasury:

Treasury Secretary Steven Mnuchin will have to figure out:

  • How to persuade Congress to forgive this tax holiday.
  • How to implement the tax deferment.
  • How to figure out all of the logistics.

That is a lot of responsibility for one person.

What is Trump Planning?

Firstly, the memorandum is not a Payroll Tax Cut. It is tax deferment, which means a delay in paying your taxes.

Secondly, this executive order has significant problems in its current form. Leaving out the tax forgiveness portions in the executive order opens the door for financial hardships. Especially when people realize they owe money in April.

Thirdly, the executive action arrives three months before an election. It is an attempt to sway voters — the tax-cutting variety.

Fourthly, if taxpayers stop paying the payroll tax, this will cause significant problems for Social Security and Medicare funding. This impacts retirees currently receiving benefits.

Lastly, taxpayers should save the additional funds received from Trump’s Payroll Tax Deferment until after April 15th, 2021. This way, they know for sure it belongs to them.

Read More Medium Stories from KR

This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any significant financial decisions.

An Idea (by Ingenious Piece)

Everything Begins With An Idea

Medium is an open platform where 170 million readers come to find insightful and dynamic thinking. Here, expert and undiscovered voices alike dive into the heart of any topic and bring new ideas to the surface. Learn more

Follow the writers, publications, and topics that matter to you, and you’ll see them on your homepage and in your inbox. Explore

If you have a story to tell, knowledge to share, or a perspective to offer — welcome home. It’s easy and free to post your thinking on any topic. Write on Medium

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store