You may have been hearing a lot of chatter recently about a "payroll tax holiday" signed into executive order by President Trump. While there is plenty of controversy surrounding the politics of the issue, we're here to talk about what this policy would mean for you and your taxes. There is a lot about this holiday that's still unclear, but we will do our best to clarify what we know.
The Payroll Tax Holiday
The proposed payroll tax holiday would offer a deferral of payroll taxes for those who earn $100,000 or less from September 1st until the end of 2020. Under the current structure, those taxes would have to be paid back with the filing of your tax return come April 15th, 2020.
What are payroll taxes?
Payroll taxes represent social security (12.4%) and Medicare (2.9%) taxes paid on wages earned by employees or income earned by self-employed individuals (for self employed individuals, this is called the Self Employment Tax). If you are employed, your employer picks up half to bill, footing 7.65%, while the other 7.65% is withheld from your check. Self employed individuals are responsible for the whole shebang, so 15.3%.
What does the payroll tax holiday mean for me?
If you are employed and you make less than $100,000, the payroll tax holiday means that the 7.65% that is withheld from your check and remitted for social security would stop being withheld, meaning would would get a 7.65% boost in your paycheck. The math varies depending on pay frequency, but a wage employee earning $100,000 can expect to see a roughly $600/month bump in their earnings - at $75,000 per year, you're looking at around $480/month, and at $50,000 per year, around $300/month.
In total, the numbers roughly shake out to $2,300, $1,400, and $1,200, respectively.
Why are these totals important? Because this is the amount of money that is tax deferred, meaning, under the current ruling, you will still owe this money come April 15th, which could come as a big shock for those who are not expecting it.
There's not a lot of clarity on what this payroll tax holiday means for self employed individuals. In theory, you would not be responsible for the 15.3% self employment taxes on your estimated tax payments for this period, but again, this is a tax deferment, not a tax cut, so you would still have to pay the amount due come April 15th of 2020.
It is still not clear on whether the payroll tax holiday will come to fruition, and there are still a lot of semantics that needs to be worked through, like whether or not employers can opt out, what it really means for self employed individuals, and who is ultimately responsible for remitting the taxes after the holiday is over.
If the payroll tax holiday does pass and it applies to you, and you don't need the extra funds to make ends meet, we suggest putting the money into an account that yields some sort of interest, so you can be earning money on your tax free loan from the government. Be sure to remember that as of now, the bill will still come due on April 15th, so choose wisely what you do with you payroll tax holiday.
We're here to answer any questions you might have, so feel free to reach out to firstname.lastname@example.org to discuss your specific situation.