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Home / Tips and Tricks / Payroll tax holiday: When it starts, how much you can get and when you have to pay it back

Payroll tax holiday: When it starts, how much you can get and when you have to pay it back



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A tax deferral may mean more money for some workers.

Sarah Tew / CNET

President Donald Trump’s executive memo signed on August 8 created a payroll tax weekend beginning in September, but it’s not really a “holiday.” It is a tax deferral that can provide more money for each paycheck, but it must be repaid.

A payroll tax cut has long been on Trump’s personal wish list as a form of coronavirus assistance, together with a second stimulus control, improved unemployment benefits and unloading (which was not renewed). The President’s unilateral directive on payroll taxes was not part of Senate HEALS Act proposal for stimulus package and is not an important factor in stimulus bill debates between the White House and Democratic negotiators.

Here is the information you need to know about the payroll tax cut, including how long it will last (the duration may be shorter than you think) and whether you will have to repay the tax you owe in 2020 or 2021.

What is the payroll tax and how is it used?

A payroll tax is a tax on both an employer and an employee who contributes to a federal program such as Medicare or Social Security. In the case of Trump’s executive action, it refers to the social security tax that is taken from an employee’s paycheck and also paid by the employer.

The way the social insurance tax works is that 6.2% is deducted from an employee’s paycheck. The same amount must also be paid by the employer, which means that a total of 12.4% is sent to the IRS. A reduction in payroll tax would mean that employees and employers would be exempt from paying this tax during a certain “holiday” period, which would potentially make your paycheck bigger (even if there is a catch – more below).






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How much money can I get from a payroll tax cut?

Salary checks usually show the amount held for social security, which corresponds to 6.2%. For example, a skilled worker who earns $ 938 every two weeks will take home a paycheck worth $ 1,000, or $ 62 more than usual.

Who is entitled to the payroll tax weekend?

The only requirement stated in the management memo is that you do not earn more than $ 4,000 every other week, for a maximum of $ 100,000 per year. People who earn more than that will not be able to participate in payroll tax. It is unclear how Trump’s deferral of payroll tax would affect self-employed and entrepreneurs who typically pay their social security contributions with their income tax.

As far as employees are concerned, millions of unemployed Americans will not be eligible for the payroll tax cut.

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Is the payroll tax weekend too good to be true? It’s not as simple as it seems.

Sarah Tew / CNET

When does the deferred tax period begin and end?

According to the management’s memo, the payroll tax weekend begins on September 1 and lasts until December 31 – it is a four-month period.

How you might not get any extra money at all

Whether employees actually see greater home control can not be guaranteed, not even with the executive action in place. It is up to the employers to decide what to do with the surplus: whether to give it to employees or stick to it to pay back to the government sometime next year.

Why do you have to pay back the payroll taxes you receive?

Salary “vacation” is a break as it is written, not a forgiveness of tax deductions. The executive memo says the Treasury Department, Steven Mnuchin, may decide to forgive the postponement, and the president said in recent press releases that he can forgive the debt if he is re-elected.

If that were to happen, it is not clear what employers who hold the money if something will be forced to do with it, which will probably not be answered until the Ministry of Finance provides guidance on the matter.

Garrett Watson, a senior policy analyst for the Tax Foundation, says there is a lot of uncertainty about what employers will need to do under the Treasury Department and what they can legally do under state law. California, for example, has strict laws that say employers cannot withhold wages from an employee’s paycheck. Other states have different rules. Then things can get messy if an employee leaves their job during this payroll tax holiday.

How do you repay deferred payroll tax?

It is still unclear. Much of the note leaves the details of the payroll tax weekend to the Ministry of Finance. One possibility is that the taxes you owe would be incorporated into your 2020 income tax.

But those who receive a paycheck are not the only ones who need to pay back these taxes.

“Employers need to bring the money one way or another,” said Samantha Jacoby, senior tax law analyst at the Center for Budget and Policy Priorities. “They can take the entire deferred tax from a paycheck at the end of the year, for example, which would probably surprise many people who think they got a tax deduction.”

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Do not count on forgiveness on payroll tax.

Sarah Tew / CNET

How will the payroll tax affect employers and employees?

The ideal situation for employees is a larger salary during the four-month holiday without having to pay back the money in 2021. Less ideal: The employees could not see any difference in the salary because their employers decided to stick to the money.

When it comes to employers, the best case scenario is that they do not pay payroll tax either. Some can also earn additional funds by sticking to their employees’ salaries in a restricted account that can collect interest. In the worst case, employers will have a large tax bill by 2021.

On August 18, more than a dozen national business organizations – including the U.S. Chamber of Commerce, the National Retail Federation and the National Restaurant Association – sent a letter to Mnuchin saying the postponement could cause “serious difficulties for employees” who would face a major tax bill in 2021. They said that they prefer to continue to withhold payroll taxes by law.

Pete Isberg, vice president of government relations for payroll management company ADP, said the federal government has not yet provided any guidance, making the September start of the tax weekend questionable.

“It is unlikely that many employers will be able to make the programming changes on September 1,” he told Fox Business on Wednesday. “We have informed the Congress and the Ministry of Finance that something similar normally requires at least six months for an orderly programming transition.”

Is a payroll tax weekend definitely happening?

Although the President’s other executive actions are legally questionable as to whether they are unconstitutional, the payroll tax weekend is within Trump’s executive powers, according to Jacoby.

It would be employers or companies that handle salaries and human resources for employers who, for some logistical reasons, can enforce this measure. Apart from that, there is no sign of any formal opposition to the holiday when it comes to trials.

How can the holiday affect social insurance financing?

The president said in a press conference on August 12 that social insurance will receive funding from the General Fund, which is the country’s account to pay for the government’s day-to-day operations. What happens after the holidays apparently depends on who wins upcoming elections. President Trump said he would consider removing the payroll tax in January next year.

Senators from the Democratic Party asked the Social Security Administration on August 19 to analyze the consequences of this permanent payroll tax weekend after January 1, 2021, as proposed by the President. The head of the administration’s actuary Stephen C. Goss says in a letter on Tuesday that if there is no compensation financing for that tax, the social insurance reserves would be emptied in the middle of 2023.

Have there been other payroll tax cuts?

In 2011 and 2012, Congress approved a payroll tax of 2% for social security. This was intended to keep the tax cuts from the George HW Bush era while giving more money to taxpayers in hopes of stimulating the economy. The result was a loss of $ 10 billion a month in social security.

There are more resources here executive measures on student loans, stop deportations and unemployment benefits. We also have information on the status of second round of stimulus checks, what i the next help package looks like like and how Negotiations are underway between Democrats and Republicans.


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