In response to failing stimulus negotiations, President Donald Trump ordered an array of executive actions at the beginning of August to extend economic relief. The president specifically called for a payroll tax cut, which went into effect on Sept. 1. As a result, employers and employees can now decide whether they want to forego paying a payroll tax, which equates to 6.2% for Social Security. Many lawmakers have opposed Trump’s executive action, as they have been worried about whether it could defund Social Security. But, as Forbes reported, that is highly unlikely to be the case.
According to the publication, this payroll tax cut, which is actually a deferral, is not likely to affect the Social Security trust fund in any major capacity. This deferral will only last for a few months (it will be in effect from Sept. 1 through Dec. 31, 2020). Because this is a deferral, meaning that these funds will have to be paid back eventually, employee wages in 2021 could see a significant reduction as employers double their employees’ payroll taxes to make up for the lack of payroll funding from 2020. As a result, many employers will likely choose not to engage in this initiative at all.
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This payroll tax cut can be applied to individual employees who earn less than $4,000, before taxes, on a bi-weekly basis (in other words, those who earn less than $104,000 per year will be eligible). Employees and their employers can choose whether they want to engage in this initiative. This deferral period is only temporary, as it will last from Sept. 1 through the end of the year. During this period, employees will not be held financially responsible for any penalties or late fees associated with the total amount that is deferred. Employers will be held responsible for paying that deferred payroll tax between Jan. 1, 2021 and April 30, 2021. So, while employees’ paychecks may be higher towards the end of 2020 (if they choose to opt-in to this deferral), they will lower for the first four months of 2021.
As previously mentioned, Trump’s executive actions, which called for this payroll tax amongst other initiatives, were issued in light of failing stimulus negotiations. Over the past several months, Democrats and Republicans have been trying to agree on another stimulus package without success. The two sides disagree on the total price point of the package. While Democrats originally called for a package that would total $3 trillion, they later said that they would agree to one that would be closer to $2.2 trillion. On the Republican side, they have not issued a plan that is greater than $1.3 trillion in total.
