One of the most talked about of the four documents describes the deferral of payroll taxes otherwise known as the employment tax. This tax is imposed under the Federal Insurance Contributions Act (FICA). This tax has two components.
- The 6.2% Social Security Tax
- The 1.45% Medicare Tax
The President directed the Secretary of the Treasury to find a way to allow for companies to not withhold the 6.2% Social Security Tax from employees. This is the employees share. The employer still is required to pay 6.2% Social Security Tax and 1.45% Medicare Tax. The employee will still have to pay the 1.45% Medicare Tax and their normal Income Taxes. To be eligible, an employee must make less than $4000 per bi-weekly paycheck which equals $104,000 per year.
A very important consideration concerning this action is that it is a deferral. The President has said he would forgive the non-payment if re-elected. This sounds wonderful, but there is a lot of question whether he can legally waive this tax. There is a school of thought that it will take an act of Congress. For this to happen, Mr. Trump has to win in November and the Republican Party must take the House of Representatives and maintain control of the Senate.
In a worse case scenario, if the 6.2% is not withheld and not forgiven, every taxpayer who takes advantage of the deferral will have a tax bill for 6.2% of their gross income for the period from September 1 until the end of the year.
The question is how to prepare for either eventuality. The simplest solution would be to not have the 6.2% withheld. If the government makes it mandatory that companies not withhold the 6.2%, employees should save as much of those funds as possible in a savings account. In that way, if the funds have to be paid in January, they are available. If they are forgiven, the money is available for other purposes.
If the funds are kept by the employee and the employee can not save the funds, there are options to pay the tax debt over time. The key is having a trusted advisor going forward especially as we approach the year end.
There is a great deal of uncertainty about the implementation. This memorandum is scheduled to go into effect in just a few days and until the Secretary of the Treasury issues guidance, employers and employees alike will have reason to fear the long-term effect of this on their bottom lines. Maybe Congress will come to an agreement and pass some legislation that solves the problem. If not, be very careful of what you accept. Be sure to read the fine-print and talk to an expert.