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Trump's Payroll Tax Cut Could Save Me $21,000. It's Still Not the Answer.

By Dan Caplinger – May 9, 2020 at 1:01PM

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There are two key reasons a tax holiday for Social Security and Medicare taxes is a bad idea.

The coronavirus pandemic has sent the U.S. economy into a tailspin. Gross domestic product was down in the first quarter, and declines in employment have reached historic levels. Even though the federal government has already passed three major measures to try to address the impacts of the pandemic on the economy, the White House and many lawmakers are still looking for more ways to put money into the hands of Americans.

Since the coronavirus crisis began, President Trump has been an advocate of a payroll tax holiday. As it happens, I might be one of the biggest winners from such a move. However, there are several reasons that better solutions exist to the economic problems facing hundreds of millions of Americans than cutting payroll taxes that go to fund Social Security and Medicare.

Why I'd ordinarily root for a payroll tax cut

From a personal perspective, reducing payroll taxes for the remainder of 2020 -- which is one possible way that the White House might seek to implement such a cut -- would be a huge windfall. As a self-employed independent contractor, I pay both the employee and employer share of payroll taxes. For regular employees, 7.65% of your pay up to $137,700 in 2020 gets taken out of your paychecks, which includes the 6.2% tax for Social Security and 1.45% for Medicare. However, your employer has to pay 7.65% in additional payroll taxes. That adds up to the 15.3% in self-employment tax that independent contractors pay.

Depending on the mechanics of a payroll tax cut, it's entirely possible that self-employed workers could save thousands of dollars over the course of the year. If I were fortunate enough to be able to earn $20,000 a month for the remaining seven months of the year, then avoiding payroll taxes on $140,000 of earnings could put more than $21,000 back in my pocket -- $17,075 in Social Security taxes and $4,060 in Medicare taxes.

Bundles of U.S. cash with rubber bands around it.

Image source: Getty Images.

The problems with payroll tax relief

As lucrative as a payroll tax cut might be for me, there are a couple of reasons it's not the best answer for the coronavirus problem. The first is that payroll tax elimination doesn't target relief where it's most needed. For the more than 30 million former workers who've filed first-time claims for unemployment benefits over the past couple of months, a payroll tax holiday would have zero direct impact on their financial situation, because they have no income on which to pay payroll taxes. Even for those who've managed to keep their jobs, the tax cut disproportionately helps higher-income earners over lower-income earners. If a package included employer payroll tax relief, then it too would benefit large businesses more than small businesses, simply by virtue of the size of their respective workforces.

Second, failing to collect payroll taxes leaves Social Security and Medicare with less funding at a time when they're already facing financial challenges. Projections show the trust funds supporting Social Security are likely to run out of money by the mid-2030s, leaving a shortfall in benefit payments from then on. The White House hasn't given any sign that it would make up for lost payroll tax revenue by depositing money from the general budget into the trust funds, so a payroll tax holiday could hasten the day of reckoning for Social Security by several years.

I'm not holding my breath

As nice as it might be to have a $21,000 windfall, it doesn't look like payroll tax relief is likely to happen. Even Republican lawmakers are wary of looking at payroll taxes as a way of trying to spur greater economic growth. That's bad news for my bank account, but it's good news for those who favor better-targeted help for those in need -- and those who want Social Security and Medicare to keep providing benefits as long as possible.

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