Here’s What the Highly Debated Payroll Tax Cut Is, and When It Starts

Kate Brierley - Author

Aug. 11 2020, Updated 4:36 p.m. ET

When Do Payroll Tax Cuts Start?
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In the face of the coronavirus pandemic, many efforts have been made to offer financial relief to families, businesses, and institutions alike. The stimulus package infused extra cash into many American’s bank accounts as the economy took a turn for the worse. Now, President Trump is calling for a payroll tax cut to boost the economy.

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But what are payroll tax cuts, anyway?

This is the question on everyone’s mind. A payroll tax cut is considered a tax holiday. It effectively reduces how much money is taken out of workers' paychecks for federal programs from Social Security to Medicare, at a temporarily lower rate that’s decided on by Congress.

“Currently, workers pay about 7.65% of their wage and salary incomes,” as CNN reports. “Employers match the amount while those who are self-employed pay both shares, though they get to deduct the employer portion.”

Workers and employers currently split the tax, each responsible for a 6.2 percent Social Security tax and a 1.45 percent Medicare tax.

The last time the government offered a payroll tax cut, employee-side tax was reduced by a reported 2 percent. According to one in a series of executive orders that Trump signed on Aug. 8, there’s a chance that employee-side tax will be deferred once again — this time for workers who make $4,000 before taxes per biweekly pay period or less, or $104,000 per year, CNBC shares.

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Here’s when payroll tax cuts are expected to start.

The deferral is set to begin on Sept. 1, continuing through Dec. 31, 2020, as Forbes reports

“This will mean bigger paychecks for working families, as we race to produce a vaccine and eradicate [COVID-19] once and for all,” Trump shares at his signing event.

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But it may not be as beneficial as it sounds.

There's a lot of controversy around the effectiveness of a payroll tax cut. While Trump has the authority to enact a tax deferral, it’s up to Congress to decide what happens to the money that was deferred. And if they don’t go the route of permanently forgiving those tax dollars, then Americans will still end up owing them back — just at a later date. 

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“The move is unlikely to deliver more cash into worker's pockets,” Business Insider reports. “The memo simply defers payment of the taxes to next year, and only congressional legislation can toss out any legal liabilities.”

In addition to possibly taking a hit once the taxes become due again, many are pointing out the fact that this move doesn’t help Americans who are the most in need of financial assistance. 

Because 17 million citizens are currently unemployed and not receiving a paycheck at all, this tax break bypasses them entirely, whereas the stimulus checks benefitted them regardless of employment status. Economists see this as a big pitfall in the relief plan, since those who need it most are excluded.

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And experts say employers might just keep the money.

Tax experts suggest that employers may opt to hold onto the money for fear of having to pay it back next year, and it no longer being there. 

"Ultimately, if they don't withhold, they're liable for the employees' share of the tax," said tax expert Seth Hanlon of the Center for American Progress. "Knowing that, employers would be taking an enormous risk if they don't withhold the tax they're legally liable for."

Stay tuned for the latest developments on this highly debated economic development.

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