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Making Sense of the Payroll Tax Executive Order

After negotiations for another stimulus bill stalled for two weeks, President Trump issued an executive order suspending the collection of Social Security payroll taxes from September 1 through December 31, while hinting that it might go beyond that time frame, too. It would impact those making less than $4,000 for any bi-weekly pay period or about $104,000 annually.

While the left (and many on the right) were not fans of the payroll tax cut for various reasons, there is one very real pitfall that might come into play later, including that the deferred taxes might have to be repaid.

Whether you agree or not with the executive order, if you have a paying job – and there are still roughly 18 million unemployed and 30 million collecting unemployment benefits – then your paycheck might be larger for the rest of the year.

Social Security Taxes

As you likely know, every time you get a paycheck:

  • 7.65% of your wages are subtracted from your paycheck and go to Social Security and Medicare (6.2% for Social Security and 1.45% for Medicare).
  • Your employer pays the same amount of tax.

President Trump’s executive order halts the Social Security portion of your ordinary payroll taxes (6.2%).

How Much Money Are We Talking About?

Here are a few quick examples:

  • If you make $10/hour and work 40 hours/week, you will keep about $25 more per week or $446 from September 1 through December 31.
  • If you make $15/hour, you will keep about $37 more per week, or $670 from September 1 through December 31.
  • If you make $25/hour, you will keep about $62 more per week, or $1,116 from September 1 through December 31.

Critics of the Payroll Tax Cut

As with all things in Washington, everything gets criticized. There are those that say the money won’t be available quickly enough and would prefer straight stimulus payments. Others worry that the payroll tax cut only helps those that have a job and the ones that don’t have a job need the help more. Then of course there is the worry of bankrupting Social Security, a perennial issue no matter which side of the aisle you support.

But Before You Spend Your Tax Cuts

If you are in line to benefit from the President’s order, you need to remember that it only suspends Social Security taxes versus making them go away forever. In order for that to happen, Congress would have to agree – and that’s a tall order.

Yes, the President has said he’s looking into the possibility of eliminating the suspended taxes if he’s elected, but wiping your tax-suspension slate clean might not be possible (and of course he might not be elected). Further, there are likely to be some companies that simply decide to continue withholding so that they aren’t faced with a really large bill later on.

As such, those impacted by this executive order need to think about the impact to their cash flow today, as well as toward the end of the year.

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Gainplan LLC employees providing such comments, and should not be regarded as a description of advisory services provided by Gainplan LLC or performance returns of any Gainplan LLC Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Gainplan LLC manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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