President Donald Trump’s payroll tax deferral kicked in yesterday and could have a significant impact on what workers see in their paychecks during the next several months.
According to guidance issued last week by the Internal Revenue Service, Trump’s executive order on Aug. 8 allows companies to refrain from withholding certain payroll taxes in the last four months of 2020, starting from Sept. 1 through Dec. 31. This would apply to any employee whose biweekly pretax wages are less than $4,000.
Currently, employers and workers each pay a 6.2% tax on wages up to $137,700, to fund the Social Security program. By halting those payments, the administration aims to provide companies with additional liquidity to offset slumping sales during the current recession. And workers should see a small but immediate increase in their paychecks — one that experts hope they would then go out and spend.
However, it’s important to note the word “deferral” in this action.
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President Trump does not have the authority to enact permanent changes to the tax code — that power lies with Congress — so his executive order expires at the end of this year. As of Jan. 1, 2021, companies that took a break from the payroll tax will be expected to begin withholding those funds again, in addition to the deferred payments. So workers could see their Social Security and Medicare contributions double during the first four months of 2021.
The president has been aggressively pushing the idea of temporarily eliminating payroll taxes for months, drawing the ire of lawmakers in both parties, as well as many economists who view the move as an ineffective (if not, problematic) way to stimulate the economy.
Critics argue that payroll holidays have a limited impact on the population.
Garrett Watson, a senior policy analyst at the Tax Foundation, an independent policy nonprofit, wrote in mid-March, “A reduction or outright suspension of the payroll tax would not be well-targeted to those most vulnerable to economic disruption. Retirees are not in the labor force and will not benefit from the tax cut.”
And a tax holiday would have no impact on the millions of unemployed in the U.S., who no longer receive a paycheck.
According to the Department of Labor, just over 1 million workers filed jobless claims on a seasonally adjusted basis in the week ended Aug. 22. The data also showed that continuing claims, which paints a broader picture of joblessness in the country and lags jobless data by one week, remained high at 14.5 million.