If you've ever gotten a paycheck, you've probably looked with scorn at the amount of taxes that get withheld from your pay. Not only do you have to have money taken out of your check for your income taxes, but the federal government also takes extra money to cover payroll taxes.
Now, in response to economic concerns about the impact of the COVID-19 outbreak, President Trump is looking at ways to provide financial stimulus in an effort to forestall a recession. One proposal that the White House is reportedly pitching is to eliminate payroll taxes for the rest of 2020. Doing so would put more money in the pockets of millions of Americans. Below, we'll take a look at the proposal and what it would mean for the typical worker.
What you're paying now in payroll taxes
Payroll taxes are imposed on workers to provide revenue for Social Security and Medicare. The current total rate of payroll taxes is 7.65%. That's composed of a 6.2% withholding tax for Social Security and a 1.45% withholding tax for Medicare.
However, there's a limit on the wages that get considered to determine the amount of Social Security withholding tax. That number changes each year, and for 2020 the limit is $137,700. If your earnings for the year are more than $137,700, you'll stop having to pay the 6.2% Social Security payroll tax once your year-to-date pay rises above that level. The 1.45% Medicare portion of the payroll tax has no such limit, so you'll keep paying that amount throughout the year regardless of what you earn.
Employers also have to pay payroll taxes. If you're an employee, your employer pays an equal 7.65% of your wages to the federal government to cover its portion of payroll taxes. Those who are self-employed end up covering both halves of the payroll tax liability, with a combined rate of 15.3%.
What the White House wants
President Trump reportedly wants to suspend the payroll tax through the end of the year. An outright elimination of the tax would make paychecks bigger, putting more money in the hands of American consumers and presumably helping to boost spending and economic activity. Those making $52,000 a year would see their take-home pay rise by $76.50 a week. That'd add up to nearly $3,000 for 2020 if the cuts take effect starting April 1.
The proposal leaves some questions unanswered, though. So far no one's said anything specific about payroll taxes on pay earned so far in 2020, with the assumption being that the federal government would keep any taxes already collected. That's fine for employees, but for gig workers and others who typically make quarterly estimated tax payments, there's uncertainty about how they'd figure out how much of their earnings came before or after a payroll tax suspension took effect.
Similarly, it's not clear whether high-income earners would benefit from a slashing of the payroll tax. Those with annual incomes of $500,000 and up are likely to go above the $137,700 wage base limit on Social Security payroll taxes before the measure could get through Congress and get signed into law. If they've already paid their maximum tax for the year, then the suspension of taxes won't save them any money. Helping the wealthy might not be a priority for President Trump, but the answer to that question could have an impact on the cost of the proposal.
Will a payroll tax cut really happen?
Discussions between the White House and Republican congressional leaders about potential economic stimuli are taking place, and the payroll tax proposal will inevitably be part of their agenda. With control of Congress divided between Republicans and Democrats, any measure would need bipartisan support. Many see that as being unlikely in an election year, but for those hoping for some financial relief if the economy starts to sputter toward recession, the prospect of a modest but significant boost in pay looks good right now.