With the country officially in a recession, many Americans are struggling financially. Lawmakers from both sides of the aisle have put forth proposals for assistance, including a second COVID-19 check. Sadly, no bill has majority support, and the Senate has now gone on recess without offering any additional coronavirus relief.
In lieu of Congress' failure to act, President Donald Trump signed several executive orders he indicated are meant to offer financial assistance during these troubled times. But one of them isn't as good a deal as it appears to be. In fact, it could lead to a very unpleasant surprise in the end.
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Here's the potential shocker in the president's proposed payroll tax cut
Under the president's executive order, the collection of Social Security payroll taxes will be deferred from the start of September until the end of December 2020. Employees pay these taxes at a rate of 6.2% of wages up to annual limits, with their employers paying the same 6.2% on wages. But under Trump's plan, workers with incomes up to $104,000 would be eligible for a payroll tax deferral.
If the taxes are not collected for four months, workers would see extra money in their paychecks for a limited period of time. In fact, those earning the maximum $104,000 might get an extra $124 per week in take-home pay because payroll taxes wouldn't be taken out of their checks. This won't be the case for all workers, as some employers may opt out of deferring the collection of taxes -- but it could happen for many Americans.
The only problem is, the president doesn't have the authority to permanently cut those payroll taxes without action from Congress -- and lawmakers on both sides of the aisle have objected to a payroll tax cut as a form of coronavirus stimulus. So despite the president's pledge that he'd make sure the deferred amount is forgiven, there's a very substantial chance the money would need to be paid back if it's not taken out of weekly paychecks.
To be clear, unless Congress acts to forgive unpaid payroll taxes that the president has indicated don't have to be collected, you will owe this money in the end. The executive order isn't a stimulus bill; it's a loan of money you owe the IRS. And if you don't realize that, you could be in for a very unpleasant surprise.
In fact, if the President isn't successful in getting the deferred taxes forgiven, an individual with $104,000 in income would end up owing $2,232 come tax time in 2021. And while you'd have had the use of that money until the bill comes due instead of having it paid to the IRS over time, an extra $2,232 tax bill could be shockingly if you aren't expecting it -- especially since the extra $124 doled out in your weekly paycheck might not make that much difference for your monthly budget.
Don't count on more stimulus money
Sadly, the chances that you'll get a real second stimulus check aren't very good. Lawmakers have all but given up on compromise legislation that includes one, instead considering a pared-down "skinny" relief bill. And by the time the Senate returns from recess, there will be just weeks left until the election, so it's likely that lawmakers will be too busy with other issues to pass compromise legislation.
Without another stimulus check coming, you'll want to make sure you're as prepared as possible for the 2020 recession. The unemployed need to find work and/or side gigs, make budget cuts, and max out available benefits. And even if you still have a job, you should be reviewing your investment strategy, ensuring you aren't overinvested in the stock market, and boosting your emergency fund to avoid financial damage if COVID-19 makes the economy worse.
