President Trump recently issued an executive order to defer payroll taxes from September 1 through December 31, 2020. We discussed this on our weekly video, This Week This Morning. While it’s easy to dismiss most of the other executive orders as legally improbable, this one has legs. The reason is that it is not a tax cut or an increase in spending. Both of those powers are reserved for Congress. Rather, the order is for a tax deferral. Here is what you need to know about the executive order:
- The order only addresses employee Social Security taxes. Medicare taxes were omitted and none of the deferral is not on the employer side. Thus, the deferral would apply only to the 6.2% Social Security tax.
- It would only apply to those earning less than $100K on an annualized basis. Thus, if you get paid twice a month, it would only apply if your wages were consistently below $4,166.67.
- Depending on the frequency of your payroll, the maximum deferral per employee would be $2,232.
- The Social Security taxes deferred would be due upon filing of your 2020 tax return in 2021. The deferral will either increase the balance due or decrease your refund with the IRS.
Many people will choose not to defer the taxes so as to not be stuck with a large bill when they file their 2020 tax return. However, there will likely be substantial pressure on Congress to forgive this debt as tax filing season gets closer. The degree of this pressure will depend on the economic circumstances at that point. IF YOU DON’T DEFER THE TAXES, YOU’LL HAVE NO DEBT TO BE FORGIVEN. It’s unlikely that if Congress passed a law forgiving this debt that they’d provide a credit to those who didn’t defer. Not impossible, but unlikely.
OUR RECOMMENDATION: defer your social security taxes and put it into savings. If the debt is eventually forgiven, you’re clear to spend as you wish. If not forgiven, you have the money available to repay Uncle Sam, with a small amount of interest earned. This isn’t life changing money, but it all counts during times of uncertainty.
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