Sept. 1 marks the beginning of the U.S. payroll tax "holiday," but you might not feel like celebrating.
The tax holiday was set by President Donald Trump, who in August directed the Treasury Department to defer the withholding, deposit and payment of some payroll tax obligations through Dec. 31. Basically, employers can choose to stop taking money out of some workers' paychecks now and possibly make up the difference by taking more out later — specifically, between Jan. 1 and April 30 of next year. That means the payroll tax deferral could affect the size of your paychecks for the next eight months.
Confused? You're not alone. The payroll tax situation is complicated, controversial and still playing out for American employees.
Here's what you need to know.
Why did Trump do this?
According to his Aug. 8 memorandum, the president wanted a "modest, targeted action" to "put money directly in the pockets of American workers and generate additional incentives for work and employment, right when the money is needed most."
Whether you call it a payroll tax cut, a payroll tax deferral or a payroll tax holiday, it's largely a workaround of sorts as Congress continues to be gridlocked over a new stimulus package.
Which taxes are we talking about?
Employers can postpone some employees' share of Social Security taxes (6.2% of wages) or Railroad Retirement taxes, according to the IRS.
Which employees are eligible for the payroll tax deferral?
There are income limits for the payroll tax deferment. The IRS says employers can only withhold payroll taxes for workers who earn less than $4,000 every two weeks "or the equivalent threshold amount with respect to other pay periods." So if your salary is less than $104,000 a year, you could be affected.
Will the payroll tax cut make my paycheck bigger?
Yes and no. If your employer chooses to take advantage of the payroll tax holiday, your paychecks will probably be a little larger — temporarily.
For example, if you're making $4,000 biweekly and your employer decides not to withhold 6.2% in payroll taxes, you could receive $248 more per paycheck.
But after the new year, once the holiday is over, your employer will likely have to withhold and pay all those taxes it postponed. Your paychecks then could be smaller, because they potentially could have double taxes taken out of them — the ones owed from Sept. 1 to Dec. 31 as well as the regular ones owed from Jan. 1 to April 30.
That's the major objection from a coalition of organizations that signed onto an open letter via the U.S. Chamber of Congress last month. They claim Trump's action creates a "substantial tax liability for employees at the end of the deferral period" — to the tune of $2,232.
"If this were a suspension of the payroll tax so that employees were not forced to pay it back later, implementation would be less challenging," they wrote. "But under a simple deferral, employees would be stuck with a large tax bill in 2021."
Though Trump wants to forgive the deferral, he needs Congress to actually do that, raising questions about the future of payroll taxes and Social Security funding.
Didn't employers already get a coronavirus tax break?
Good memory! Yes. The CARES Act, passed in March, allowed employers "to defer the deposit and payment of the employer's share of Social Security taxes," through Dec. 31, according to the IRS. (Self-employed Americans could defer certain taxes, too.)
Social Security taxes typically total 12.4% of earnings. For now, employers don't have to pay their part or collect (many of their) employees' part.
How do I know if my employer is deferring my payroll taxes?
Ask. Or Google: The Washington Post reported that the federal government is taking advantage of the payroll tax deferral for its 1.3 million employees.
Low participation is expected in the private sector. For example, UPS has said it doesn't plan to defer payroll taxes, according to the Wall Street Journal.
Can I opt out of payroll tax deferral?
It's unclear. The Society for Human Resource Management, or SHRM, wrote in a blog post that the IRS guidance "does not provide for allowing individuals to opt out" once their employers have opted in to deferring payroll taxes.
When will the payroll tax 'holiday' actually happen?
Pete Isberg, vice president of government relations for the HR software firm ADP, told NPR it could take a while for payroll programs to change to accommodate the deferral.
"Some will be able to do it in October or November. And some may just never do it," he added.
Is this all secretly about the 2020 election?
According to some observers, yes.
"Donald Trump’s scam is obvious — juice paychecks before the election and sock workers with a massive tax bill early next year when he’ll be out of office or never have to face voters again," Sen. Ron Wyden, D-Ore., said in a statement.
Trump himself has alluded to the upcoming presidential election, saying that "if I’m victorious on Nov. 3, I plan to forgive these taxes and make permanent cuts to the payroll tax" — something "Joe Biden and the Democrats may not want." He tweeted on Sept. 10 that "when we win I, as your President, will totally forgive ALL deferred payroll taxes with money from the General Fund," adding "I will ALWAYS protect Seniors and your Social Security," while "Sleepy Joe Biden will do the opposite, he will raise your taxes and DESTROY our Country!"
Biden called Trump's August actions "another cynical ploy designed to deflect responsibility." Other critics have cast the payroll tax holiday as an insufficient Band-Aid on the coronavirus crisis, with many bringing up the fact that the break only helps people who still have a paycheck. Some 27 million people are receiving unemployment benefits right now, according to the federal Department of Labor.
Questions also remain about what, exactly, employers are liable for in 2021 and how they'll deal with workers who have left the company by the time the tax bill comes due.
If there's one thing everyone can agree on, it's that a lot is still up in the air when it comes to the payroll tax holiday. So you might want to hold off on popping the Champagne.