Millions of people are on edge about their expired unemployment benefits and whether a second round of stimulus checks is coming.
But there’s another issue that keeps resurfacing as lawmakers wrangle over the next stimulus bill: payroll taxes.
The Republican-proposed HEALS Act didn’t include a payroll tax cut. Democrats are widely opposed to the idea. But President Trump continues to push for one and has said he could suspend payroll taxes without waiting on Congress.
So what exactly are payroll taxes, and who would benefit from reducing them or temporarily eliminating them altogether?
8 FAQs: What Are Payroll Taxes and How Would Cutting Them Work?
1. What are payroll taxes?
Payroll taxes are the taxes that are deducted from your paycheck for Social Security and Medicare. Sometimes they’re referred to as Federal Insurance Contribution Act (FICA) taxes.
For most employees, payroll taxes amount to 7.65% of earnings. You pay 6.2% of the first $137,700 of your salary for Social Security and nothing on earnings above that amount.
The remaining 1.45% goes toward Medicare. You’ll pay the full 1.45% no matter how much you earn. Unlike Social Security taxes, Medicare taxes don’t have a salary cap. Single filers earning above $200,000 and married couples filing joint returns earning over $250,000 pay an additional 0.9% Medicare tax.
Your employer matches the 6.2% you pay on your Social Security wages and the 1.45% you contribute to Medicare. However, they aren’t required to pay the additional 0.9% Medicare tax if your income exceeds the above thresholds.
The money that’s withheld is credited to your future retirement benefits.
2. How much do self-employed people pay?
Self-employed people are on the hook for both the employee and employer contributions, so they typically pay 15.3%, rather than 7.65%, into Social Security and Medicare.
3. Are 401(k) contributions subject to payroll taxes?
Yes. While you don’t pay income taxes on contributions to a traditional 401(k), Social Security and Medicare taxes are deducted upfront.
4. How much would a payroll tax cut save me?
The answer depends on how much you earn and how much the tax is reduced by. As of July 23, Republicans hadn’t yet released their proposal, so we don’t know whether we’re talking about a reduction or temporarily eliminating it.
Suppose the payroll tax was completely eliminated for a year and you earn $40,000. You’d save $3,060 a year, which would put an extra $59 or so in your pocket each week.
5. How would a payroll tax cut help me if I’m unemployed?
It wouldn’t, at least not directly. A payroll tax cut goes to people earning a paycheck and probably the businesses that employ them, as well.
Of course, supporters argue that people will spend the extra money and create jobs. Those in favor also say that businesses will be able to keep more workers on the payroll and even hire more workers if they’re spending less on taxes.
6. Are payroll taxes taken out of unemployment benefits?
No. While unemployment is taxed as ordinary income, you won’t pay payroll taxes on it.
7. Have payroll taxes ever been cut before?
Yes. The Obama administration temporarily cut employee payroll taxes (but not employer payroll taxes) by 2 percentage points in 2011 in the aftermath of the financial crisis. The tax cut only reduced Social Security taxes. Medicare taxes weren’t affected.
8. Would a payroll tax cut put my future Social Security and Medicare at risk?
Probably not. For the 2011 payroll tax cut, Congress used general revenues to make up the shortfall in the Social Security trust.
Can Trump Really Pass a Payroll Tax Cut on His Own?
The president has the authority to delay the due date for taxes during a declared disaster, but he can’t change the tax law.
So while Trump could order the IRS to suspend payroll tax collection by delaying the due date, he’d still need Congress to actually forgive the taxes. Otherwise, the tax bill will eventually come due.
Unless the cut is passed into law, tax experts say employers would likely err on the safe side and continue to withhold payroll taxes from employee paychecks.
Robin Hartill is a certified financial planner and a senior editor at The Penny Hoarder. She writes the Dear Penny personal finance advice column. Send your tricky money questions to DearPenny@thepennyhoarder.com.
This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.
from Make Money – The Penny Hoarder https://ift.tt/2DC292q
0 Comments