Trump has proposed a payroll tax cut in response to the coronavirus fall out. What would that mean for small businesses?
Update July 28, 2020: Per CNN, President Donald Trump is pushing Congress to include a payroll tax cut in the next economic relief package. He unsuccessfully pressed for one earlier in the year (see below), and renewed comments this week make it clear the policy remains a key White House priority. But a growing number of Republicans aren’t in favor of the idea and most Democrats don’t support it.
Treasury Secretary Steven Mnuchin said Tuesday at a news conference that the administration is considering sending direct payments to every American instead of a payroll tax cut.
“We’re looking at sending checks to Americans immediately,” Mnuchin said.
But Trump is not ruling out a payroll tax at some point.
“Payroll tax is one way, but it does come over a period of months, many months,” Trump said. “And we want to do something much faster than that. So I think we have ways of getting money out pretty quickly and very accurately.”
What a payroll tax cut would entail
On March 10, 2020, President Trump reportedly asked Republican lawmakers to adopt a 0% payroll tax cut, which would last throughout 2020. A few days later, the president tweeted his support for a full payroll tax cut, through December 31, 2020.
If you want to get money into the hands of people quickly & efficiently, let them have the full money that they earned, APPROVE A PAYROLL TAX CUT until the end of the year, December 31. Then you are doing something that is really meaningful. Only that will make a big difference!
— Donald J. Trump (@realDonaldTrump) March 13, 2020
According to SHRM, the payroll tax cut seeks to improve the United States economy, which has suffered the sharpest stock market decline in over a decade. The payroll taxes in question are Social Security and Medicare taxes — also known as the Federal Insurance Contributions Act taxes — which both employees and employers are required to pay.
Potential impact on small businesses
As a small employer, you must withhold FICA taxes from your employees’ wages plus pay your own portion of those taxes.
For 2020, the FICA tax rates are as follows:
|wdt_ID||Type of Tax||Employee Rate||Employer Rate|
|1||Social Security tax
||6.2%, up to the taxable wage limit of $137,700||6.2%, up to the taxable wage limit of $137,700|
||1.45% of all taxable wages||1.45% of all taxable wages|
There’s also an additional Medicare tax of 0.9% on earnings over $200,000. Employers do not have to pay this extra tax, only high-income earners.
A 0% payroll tax cut for the remainder of the year means that you and your employees would not have to pay any more FICA taxes for the rest of the year. If the payroll tax cut extends to additional Medicare tax, then your high-income earners would save on that tax as well. We should also consider the possibility of the FICA tax cut being a reduced percentage, rather than totally slashed.
Either way, if a payroll tax cut comes to pass, your payroll system will need to be updated to reflect the mandated payroll tax amounts. Your payroll technology vendor would have to modify your payroll software to show the new tax rates. If you outsource all of your payroll administration duties, including payroll taxes, your provider would be responsible (as usual) for withholding — and, if applicable, remitting — payroll taxes according to the new requirements.
Unlike employees, self-employed individuals do not have an employer to pick up half of their FICA tab. Therefore, their self-employment tax rate is 15.3%, for Social Security and Medicare taxes. If passed, the payroll tax cut legislation would extend to self-employed individuals.
The proposal has encountered heavy criticism
Lawmakers from both political parties aren’t embracing the proposal, with many saying it’s too expensive. Estimates reveal the cost to be around $90 billion per month.
Opponents say that a payroll tax cut isn’t effective because the pandemic is keeping so many people away from work. They argue that even if people are able to work, the extra money they gain from the payroll tax cut won’t boost the economy, partly because people are increasingly buying goods online instead of visiting brick and mortar stores.
Other critics say that a payroll tax cut would not happen fast enough for people to stave off the financial effects of COVID-19. The Economic Policy Institute notes, “A COVID-19 recession will come fast and people will need lots of help quickly. A payroll tax cut will dribble out gradually over time.”
Also, the more money people earn, the more payroll taxes they pay. Therefore, “A payroll tax decrease gives too much money to people who don’t need it, and too little money to people who do,” per an article published by Forbes.
But that’s not to say there aren’t supporters
The U.S. Chamber of Commerce is calling on the Trump Administration and Congress to implement the following 3-pronged solution for businesses impacted by COVID-19:
- Cancel payroll taxes for 3 months, from March through May
- Streamline loan programs for small businesses, including eliminating certain stringent requirements
- Create credit facilities that would supply loans and loan guarantees to specific businesses with more than 500 employees
Where the proposal currently stands
The House did not include the president’s payroll tax cut proposal in its recently passed H.R. 6201, Families First Coronavirus Response Act. However, on March 17, 2020, news outlets reported that the president will ask Congress to approve an emergency stimulus package of approximately $850 billion, which could include a payroll tax cut.
Meanwhile, though, employers should keep complying with FICA tax rules as normal. Also, stay abreast of the latest developments so you can be ready for any payroll tax changes that might arise.