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Trump’s Wage Tax Vacation Starts Today: How Does It Work?



An ordinance signed by President Trump in early August provides for wage tax vacation for American workers, which can be implemented starting today.

While the leadership of Congress is still negotiating the next economic stimulus package to create economic relief during the coronavirus pandemic, Trump announced four executive orders at a briefing on August 8.

The payroll tax vacation has the potential to put more money in workers̵

7; wallets, but it’s only a temporary measure – and one that could have negative repercussions later.

As tax leave begins today, some confusion remains about whether employers will participate and how the deferral will affect workers who are already feeling financially tight.

Forbes consultantCalculate your wage tax savings according to Trump’s Executive Order

Details on Trump’s wage tax vacation

Trump’s Executive Order instructs the Treasury Secretary to postpone some wage tax obligations.

Any employee receiving less than $ 4,000 pre-tax per fortnightly compensation period is eligible.

The postponement period is September 1 to December 31, 2020.

Typically, employees and employers each pay half of the total social security tax of 12.4% that is due for each employee. According to the implementing regulation, however, employers can waive withholding the 6.2% of employees for social security, but must contribute their own share for each employee.

According to Trump’s order, the deferred amounts will not be penalized or interest paid.

However, the guidance published by the IRS on August 28th stipulates that deferred income taxes must be repaid between January 1st and April 30th, 2021. Any tax that is not repaid within this window will be subject to interest and penalties. Employers could collect these penalties from their workers if necessary, as announced.

Workers who see their paycheck increase this fall could see double social security tax withheld from their paychecks in early 2021 to repay the deferral. Due to a lack of guidance on exactly how employees are expected to repay deferred income tax, many employers are expected to continue withholding tax as usual while on vacation.

Do you have to repay the deferred taxes?

The president has the power to defer payroll taxes as he made a nationwide emergency statement in March. In a state of emergency, the Minister of Finance can make changes to the tax liability.

However, it is up to Congress to decide whether or not to make deferred income taxes permanent.

“This fake tax cut would be … a big shock to workers who thought they would get a tax cut if it was just a delay,” said Ron Wyden (D-OR), a member of the Senate Finance Committee, in a statement as Response to Trump’s Executive Orders in August. “These workers would be affected by much higher payments later.”

It is likely that Trump’s move to postpone the payroll tax will suffer some setback even as it begins implementation.

Last month, the U.S. Chamber of Congress and more than 30 business groups signed a letter expressing frustration at the vague guidelines for deferring payroll taxes and calling on the White House and Congress to allocate the deferred taxes. “With a simple deferral, the employees would be confronted with a high tax burden in 2021,” says the letter. “Many of our members feel it is unfair to employees to make a decision that would impose a high tax burden on them next year.”

Possible long-term effects of a wage tax cut

Trump was a vocal advocate of lowering wage taxes.

“If I am victorious on November 3rd, I plan to pass these taxes and permanently lower the income tax,” he said when he signed his Executive Orders on August 8th.

While lowering wage tax would increase workers’ paychecks, it will only help the people currently in work. The national unemployment rate stands at 10.2% after peaking at 14.7% in April.

Opponents of a wage tax deferral say it’s not enough to stimulate the American economy at a time when so many people are out of work. While people who earn paychecks would see a slight increase, the deferred amount is unlikely to match the amount they might receive through a one-time cash payment, such as the economic impact payments approved by the CARES Act.

And it’s unclear how Trump plans to finance social security without wage tax. “The payroll tax goes to programs Congress promised the American people,” said Carl Tobias, professor at the University of Richmond School of Law.

If wage taxes were abolished without a new source of Social Security funding, the fund could be depleted by mid-2023, according to a recent letter to Senate Democrats from Stephen Goss, chief social security actuary.

The last time Americans got a wage tax cut was in 2011, when the Obama administration cut wage tax for workers by 2%. The unemployment rate this year was in the region of 9% after the great recession.


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