The coronavirus pandemic is a big problem and requires big solutions as well. On Aug. 8, the president tried another tactic to help the average American by ordering the Treasury Department to put a temporary wage tax pause button on employees (i.e., those who work as W-2 employees) to press.
While it sounds like a helpful step, it is fraught with problems. Even if all of these shortcomings are addressed in the coming weeks, the effect may not be as life changing for many people.
Still, it’s worth keeping an eye on it.
To understand how the wage tax break can affect you, the first thing to do is to review how wage tax works.
How do income taxes work?
Every time you get paid, the government calls for a lower income tax.
Usually you and your employer split the payment. You pay 6.2% of your paycheck for Social Security and 1.45% for Medicare. This is known as the “employee share”. Your employer also pays the same amount called the “employer’s share”.
The employee’s portion of your tax liability is automatically withheld from your paycheck by your employer so that you only really “see” it when you look at your pay slip.
Recently, Congress passed the CARES bill, which gave employers the option to defer (i.e., defer) their employer’s share of payroll taxes. With the most recent presidential memorandum, you may also have the same option.
What has changed in the wage tax accrual?
A presidential memorandum is similar to an executive order in that it tells government officials how to do their jobs. The difference is that an executive order requires the president to provide a constitutional or legal basis to justify the order.
In this case, the president issued a memorandum instructing the finance minister to find out how employees can defer their share of payroll taxes.
Here’s a quick rundown of what you need to know:
- It only affects employed persons (especially W-2 employees).
- Unless Congress passes new laws, you will have to repay these taxes later
- The deferral only lasts three months – from September 31, 2020 to December 31, 2020
- There are many unanswered questions about how this would work in practice
- This only applies to people earning less than $ 4,000 every two weeks (i.e. $ 104,000 / year).
- It allows employers to temporarily collect social security taxes – not all wage taxes – from employees
Questions about income tax deferral
There are currently many unknowns. The Treasury Department will issue “guidelines” every day – i. H. Rules on how this would work – but until it does, the memorandum raises many questions.
Is it legal
Usually, Congress is responsible for making laws about taxes. Traditionally, the president cannot change that. For this reason, many legal scholars expect that this memorandum could be challenged in court. It is possible that this memorandum will be declared unconstitutional. If so, it is only legal if Congress passes legislation to do so.
How Much Will It Help You?
Since the forbearance only lasts three months, only affects people making less than $ 104,000 a year, and is limited to social security taxes only, this may not be the blessing you expect.
For someone who hits the max ($ 104,000 annually, pre-tax), that would add up to an additional $ 1,488 total over the next three months (in other words, an additional $ 124 / week). Most people don’t make that much though. In 2018, the median household income was $ 60,293 and you can expect an additional $ 862 (or an additional $ 72 per week) for these individuals over the next few months.
Will you owe or forgive a large tax bill?
The biggest unknown right now is what will happen to the taxes that you no longer have to pay today.
Congress can pass laws to forgive these deferred taxes, but there are no guarantees that they will. And if Congress doesn’t, you have to pay those taxes back. This could already be the case for your next tax return. This means that if you file your taxes early in 2021, you might owe a heavy tax burden.
Currently, this postponement of wage tax is nothing more than a short-term, interest-free loan that you have to repay in a few months anyway. This hardship will not have much of an impact as workers struggling to make ends meet today are unlikely to be able to repay the debt in full in three months.
Can you unsubscribe?
Given all of these uncertainties, many tax experts advise business owners to continue collecting and paying wage taxes as usual. There are just too many unknowns right now. But that also raises another question – can Manpower decide to quit the program completely? Employers do to have Impose deferred income tax? Unfortunately that is not yet clear either.
What if you leave your job?
The whole country is not going to stay in a time-free employment bubble for the next three months. Companies are closed, employees are laid off, hired or terminated. It’s messy and right now it’s not clear what will happen if your employment changes in the middle of that three month hiatus in payroll taxes.
Say you currently work for a grocery store Not If you take out your income tax, you will be laid off for a few weeks and you will be unemployed. Then start working for a landscaping company that does Adhere to your payroll taxes.
In this scenario, you went through a period of time where you paid no wage tax, then you were unemployed, got back into employment, and paid wage tax. It is not currently clear how to deal with all of this clutter at the end of the year.
We’ll know more soon
Right now there is so much we don’t know. The Treasury Department should release more information on how this could work in the coming days. Thereafter, it is up to Congress to decide whether or not these taxes should be paid back.
More importantly, all of this assumes you still have a job. If you are one of the 10% of Americans who were unemployed in July, this is not helping you at all. Unfortunately, we still have a long way to go.
In the meantime, it might be a good idea to check with your employer’s HR department about how they handle your paycheck. The postponement of payroll is meant to put more money in your pocket for you to spend over the next several months. But remember – unless Congress says otherwise, you will need to repay the deferred amount during tax season.
If you are not currently facing financial difficulties, it is a good idea to put those deferred taxes aside in a savings account so that you have the money to pay taxes back when due. You can check with your HR department to see how this is based on your paychecks.