Last month, the president inked an executive memorandum that allowed employers to temporarily stop withholding Social Security taxes from workers’ paychecks starting in September until the end of the year.
President Donald Trump’s aim was to increase people’s paychecks at a time when many are struggling with the economic fallout from the COVID-19 pandemic.
But the implementation of the deferral hasn’t been seamless. Guidance came out late, so many employers had little time to change their payroll processing systems. Other drawbacks to the deferral also popped up.
This week, Cashay Editor Janna Heron discusses the ins and outs of this payroll tax deferral with Denitsa Tsekova, a Yahoo Money and Cashay reporter, in the latest episode of the Money, Honestly podcast.
The podcast episode is based on earlier reporting Janna did for the Yahoo Money and Cashay.
Janna: Hi, This is Money, Honestly. I'm Janna Heron. Today, we're going to do a little switch up. Instead of me interviewing one of my reporters, Denitsa Tsekova a reporter on my team at Yahoo Money and Cashey will be interviewing me. We'll be talking about President Trump's payroll tax deferral. Welcome Denitsa, and thanks for taking on the role of interviewer or host today.
Denitsa: Great, thanks so much for having me. I can't wait to be asking the questions and not answering them. This is great.
So we both talk a lot about President Trump's executive actions, some of them executive orders, memoranda, but the payroll tax is interesting. So it's a payroll tax deferral... but I guess before going into what’s a payroll tax, do I, as an employee, pay a payroll tax? Do my employer pays the payroll tax? What's the breakdown?
Janna: Yes, to all those things. So payroll tax is really encompass a few different types of taxes that taken out of your paycheck automatically by your employer. So that's why when you first get a job and you think you're making, say $500 a week, and you look at your paycheck and you're making less than that, that's because those taxes are taken out. So payroll taxes include federal, state and local income taxes, unemployment taxes, both federal and state, and then Medicare and Social Security taxes.
But if we're talking about the deferral, what we'll be focusing on is actually the Social Security tax that's taken out. So that's the 6.25% Social Security tax that is withheld from your paycheck. Your employer also pays another 6.25% in Social Security tax as well. These taxes together fund the system that pays out benefits to Social Security recipients.
Denitsa: Okay. So it's a deferral, both me and my employer pay for this, but then who's eligible for that? Are all employers in this? Am I going to see less money withdrawn from my paycheck next week? What's happening?
Janna: Okay. So like you said, last month, early August, President Trump signed an executive memorandum and that directed the treasury secretary to allow employers to temporarily suspend withholding Social Security taxes for their workers starting in September and through the end of the year, but this doesn't apply to everyone. Not everyone is eligible. So it's really focused on people who don't make a ton of money.
So workers make less than $4,000 biweekly can defer the 6.25% tax that they would usually pay into Social Security. It was supposed to start September 1 and end December 31 of this year, but we can get into why that might not be happening right now.
Then if you make, say make $4,001 biweekly, that's it, you've missed the cutoff. So there's no phase-in or phase-out if youmake more. So it's a hard eligibility requirement at $4,000 biweekly.
Denitsa: Oh, wow. That's very interesting.
Janna: Yeah. And you asked, what does that mean when you get more money, why did Trump do this? You do get a larger paycheck. You don't have that 6.25% coming out, so you have it going into your own pocket. So you'll have a slightly larger paycheck each month that helps offset any issues, financial issues that you may be running into during the pandemic.
Just to give you an idea of how much more you might see, say you make $50,000 a year, each biweekly pay period, you would see your paycheck go up around $119. So yeah, it's not insignificant. It's not going to pay your mortgage or your rent, but it definitely could pay for a week's worth of groceries.
Denitsa: Okay. That sounds pretty good and promising, but from my limited knowledge about payroll tax, I've heard that this is not a very popular proposal like the payroll tax expansion because I know the person that has been vocal about it even before the CARES Act is President Trump but I know he doesn't really have support from neither Republicans nor Democrats. So if it sounds so good, why is not popular? Are there any drawbacks for workers?
Janna: Yes, because this is a deferral. So what does that mean? It means that you don't have to pay the 6.2% from September to December, but you eventually will have to pay it because if it's not forgiven, which only Congress can do and hasn't done yet, then you will have a tax bill next year. So that means you have to pay it back by next year. To give you an idea, let's take that same example where you get $119 per paycheck if you're making $50,000 a year. So your tax bill due in 2021, if you took the deferral from the beginning of September to the end of the year, your tax bill would be $1,073.
What that means for some people, it means that it could eat into any tax refund that they would get next year. So they would have a smaller refund, but if they were more at the edge where they don't usually get a refund, that means that they will actually have to pay Uncle Sam a thousand dollars. So that's a big deal. So the way they are going to try to mitigate this is that if you take the deferral, so you get that 6.2% from September to December, starting next year from January to April, your employer is going to withhold double the taxes.
So pretty much 12.4% will be withheld, could be a little bit less depending on if you make more money next year. But basically, all that you had deferred this year will be taken out of your paycheck next year from January to April in equal increments. So that way, you won't have this big tax bill, but you're going to have a smaller paycheck for the first quarter and then April of next year.
Denitsa: Okay. Wow. So it has nothing to do with suspension. I'm going to pay that tax eventually. It just moves from this year to next year, yes?
Janna: That's right. Because again, he can only defer it. He needs Congress to say, "Okay, we're going to forgive those amounts," and that has been done before in the past when there's been another temporary tax, payroll tax deferral. But right now, as probably even better than me, Congress is not really coming together on much of anything right now. So I don't see that payroll tax deferral being forgiven.
Denitsa: Okay. So for workers, it doesn't really have much impact rather then I can pay it later. But I don't know if I'm not in a great financial state in 2020, what are the chances of being in a much better place in 2021?
Well, but what about for employers? Is there something good about it? Are there even more drawbacks for them not to be withholding the payroll tax?
Janna: So I think employers, from what I've talked to, early on when this was floated, it was interesting to them. They thought maybe this can help the workers, but I also think they thought this would come with Congress forgiving the deferral. What happened is that after the executive memo was signed, it was August 8.
There was no guidance that was put out until one business day before this deferral was supposed to start on September 1st. So employers had no idea how to do this. They had to change their own payroll systems. These are not easy things to do, especially if you have to do it in the middle of the year, in the middle of a quarter and it applies only to certain employees and not all of them. So just to technical issues are very daunting for employers.
I've talked to ADP, which is one of the largest, if not the largest, payroll processing company. Even they couldn't get it ready for September 1 start, they said, mid-September. I've talked to them and they do have it up and running, but they said for smaller payroll processors, for companies that do their own payroll and they don't depend on an outside company, they didn't expect them to be able to implement this until late September, maybe even October.
And part of the reason is employers don't want to force their employees to opt into this. So you have to give them a choice. You have to keep track of who opts in and who doesn't. You also probably have to provide a choice to opt back out. Say you do it for two months and you decide, or two paychecks and you want to not do it anymore, then there's the question of what happens if somebody quits? What happens when someone retires? How are you still supposed to be collecting next year the withholding, double withholding if that person's no longer there? So there are all these logistical problems that make it very hard for employers to do this, especially small businesses that are having a hard time in general in this economy.
Denitsa: So it seems like most of the executive orders, one can see how big all those agencies have to do a lot of more work to implement it and there is reading not the time to do that. So with this one, it was supposed to start at the beginning of September. We're already in mid-September... so what has been done so far? Where are we at with implementing it?
Janna: I know of one place or one big place actually, that is implementing it, and that is the executive branch agencies. So those are the Defense Department, the Agriculture Department, the Department of Treasury, HUD, all those. They have been directed to opt all of their employees who are eligible into this payroll tax deferral. So that's an estimated 2.2 million federal workers and military members, but they can't opt out.
Again, it's very difficult to implement just the payroll tax referral as it is, but to give people choices to opt in and opt out, it makes it even more difficult, but that's not been widely well-received. So a lot of unions that represent federal employees are asking that people are able to at least say they want to be opted in or able to opt out. It's a little bit of a mess, but because even the House of Representatives, they didn't opt in for their eligible employees. We do know of people who are doing it, it's the government, but that's really... That's what we've heard mostly. If you want to talk about employers who are not doing it, I can talk more about that.
Denitsa: Okay. That's interesting. So those federal workers don't even have the choice. It's automatically implemented for them?
Janna: That's right. That's right. So if the Office of Management and Budget said, "This is just the way we're doing it." They've directed all of the branches, "This is what's going to happen," and that's it. That's all they got. They don't have any other choice.
Denitsa: Wow. Okay. So this is happening for federal workers, but you said that there seems to be a different kind of theme in the private sector. What is happening? Are there companies implementing this?
Janna: So I have been talking... I have sent out emails to major trade organization organizations like the National Retail Federation, the National Association for Manufacturers, and all of these places, and overwhelmingly, I'm hearing back that, no, none of their members are doing this, or they would be very surprised if many of them implemented it just because it's just so unclear.
The guidance left more questions unanswered than answered. I've had some people tell me that it's just unworkable. So there isn't this huge uptake in employers offering the deferral. So it's really falling flat. These are major companies that know what they're doing. I'm still waiting to hear back from ADP. While they're able to do it, they've got their systems up and running, I'm still waiting to hear back to see how many of their clients have actually decided to do it. And again, when I talked to organizations that represent small businesses and restaurants especially, this is just too much right now for them to be able to take on.
Especially restaurants, they're dealing with all kinds of logistical issues. A lot of them have gotten grants and loans from the government that require them to fulfill certain requirements. So this is just an added thing that wouldn't help them and they don't think it would really help their workers because they're not confident that next year like you said, people are going to be in a better position financially where they can afford to see a smaller paycheck.
Denitsa: Okay. So seems like, with a temporary deferral, there are a lot of issues, but we've heard from the president, who's been very vocal about the payroll tax. He wants to make it permanent.
So first, does the permanent payroll tax deferral work better than what we see now? Second, if we don't pay payroll tax, is Social Security going to struggle? What will happen to those programs that use the payroll tax for funding?
Janna: And you're right. As you said, Trump is a big supporter of getting rid of the payroll tax completely and has even said before, that this is something that he would want to do if he wins the election. This is going to look different because this is not temporary. This is permanent. What this means for the future of Social Security and whether there are enough funds in it, depends on if anything is done to offset those payroll taxes that will no longer be paid. So if not, if there is no money coming elsewhere, so you earmark money from another place to fill in that gap, what that means is a permanent payroll tax would deplete social security funds by 2023.
Payroll taxes really are important to funding the financial security of our seniors and for people who are disabled and cannot work. So that's hypothetical. This was put together by the chief actuary from the Social Security Administration, but times where we have in the past, deferred a payroll tax, there were times where they found money elsewhere. So you could do it, and then you have to go to an existing reserve or somewhere else to fill in that gap. But Trump hasn't yet put together what this would look like.
So otherwise, if nothing replaces those funds, then you're just depending on the interest that it earns. And again, that's just not going to take you very far. So it's not on the horizon yet. It really depends on what happens in the election. If Trump is reelected, then that might be one of his signature moves since he wants to get rid of the payroll tax. But otherwise, it's this temporary payroll tax deferral that's actually here, but not many people are doing it.
Denitsa: So it seems like payroll tax, we're just starting to talk about it and we will continue maybe in the future. It's interesting for me that it's not a proposal that's popular, even among Republicans. For Democrats, obviously they're very vocal about not supporting it, but even the Republican party, there wasn't strong support for it. So it would be really interesting to see what happens going forward.
Janna: Absolutely. Because the thing is, if you can't come up with a way to replace those funds, what you're actually doing is cutting Social Security and that's not a very popular policy position among seniors who are a very reliable voting block. So yeah, we'll see what happens.
So I think that's pretty much all that I can tell you about the payroll tax referral. So thank you, Denitsa, for joining us today on Money, Honestly, and playing host, and thanks for everyone listening. Head over to Apple Podcasts and leave us a five-star rating and review. We'll see you next week!
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