What Is Payroll Tax Relief?
Payroll tax relief isn’t that common of an occurrence, but in 2020 we saw a bunch of uncommon occurrences. We saw a stimulus check, lots of help from the federal government, the deferral of rent, coronavirus, Trump and an attempt at overturning an election – it was a year of unpredictability.
Amidst all the chaos, we also saw payroll tax relief. Since it rarely occurs, many Americans likely didn’t know what a payroll tax cut (technically a deferral) even meant.
The IRS regularly withholds social security, medicare, and other taxes from your regular paychecks. Since you never get the cash from these withholdings – you likely forget that they’re even regularly doing this.
However, during a pandemic (or other economic disasters) – every penny counts. During the coronavirus pandemic, the United States government (led by President Trump) passed payroll tax relief to help the average American worker.
What Is Payroll Tax Relief?
Payroll tax relief stops the collection of some taxes from workers. Usually this includes medicare and social security.
This means that workers will receive bigger paychecks, since these usual taxes will not be taken out. While removing your share of social security tax may not instantly make you rich, it can help during certain dire situations (like COVID-19).
These taxes break down as follows – a 12.4% Social Security tax, and a 2.9% Medicare tax. Both taxes are usually split between an employer and an employee.
While the removal of these taxes from your paycheck won’t make you a millionaire overnight, not paying for Medicare or Social Security eventually adds up.
Who Benefits From Payroll Tax Relief?
Those making $104,000 or less will benefit from payroll tax relief. In fact, the more you earn, the more you will benefit from payroll tax relief.
This is because Social Security and Medicare are taken out of paychecks by a percentage. 10% of $100,000 is $10,000 – but 10% of a $50,000 paycheck is only $5,000 – so those earning $100,000 will see an extra $10,000 in annual income when there is active payroll tax relief.
Who Doesn’t Benefit From A Payroll Tax Cut?
Essentially, anyone who is not earning a regular paycheck will not benefit from payroll tax relief. Controversially, during the coronavirus pandemic, many argued that those most impacted (i.e. those who became unemployed) were not able to reap the rewards of the payroll tax cut.
Even worse, high-earning Americans benefit from payroll tax relief greatly – further increasing the wealth gap in the country. While no program is perfect for everyone, payroll tax relief is typically very controversial.
Does This Hurt Social Security And Medicare?
While many are concerned that payroll tax relief will impact next year’s social security and medicare, the treasury secretary usually has this taken care of. The government (and other entities) can help cover any missing portions of social security taxes, while allowing Americans impacted by pandemics to increase their take-home pay.
Payroll Tax Relief Is Not A Cure-All
While it’s definitely helpful for the average worker to take home more money – there are a number of flaws with payroll tax relief. For starters – it’s only a temporary fix.
We can’t withhold social security and medicare taxes forever – even when coronavirus was raging. So payroll tax relief is really just a deferral, not a long-term fix.
Also, if you make more than $100,000 per year, or are self-employed – payroll tax relief typically doesn’t apply to you. During the coronavirus pandemic, Trump passed a unique payroll tax cut – but not everyone benefited, and many still had to pay their portion of social security taxes.
Though it may seem like you never need to pay these taxes – nothing could be further from the truth. These taxes will be due eventually, meaning you may just want to hang on to the extra money you take in.
As the saying goes – there’s no such thing as a free lunch. When we get stuck in desperate times, it may be helpful to temporarily have deferred taxes.
But oftentimes this leads to a much bigger tax bill later. The Cares Act was a quick way to help millions of struggling Americans, but acts like this are usually just temporary band-aids on much bigger wounds.
Other Factors To Consider
The coronavirus pandemic caused many shifts in the economy. Your tax return during and after the pandemic may look a little differents, and there have been a lot of FAQs published regarding the economic security of operating a business during this time.
You’ll still need to pay income tax – it doesn’t matter if you voted for Biden (or other democrats), if you are picking up unemployment benefits, or even if you have a tax credit. While your tax payments may have a later due date – you still need to pay them.
The treasury department has done their best during this challenging time, and FICA has also been helpful. The average taxpayer may not see much difference during this time, but that’s because the biweekly pay period hasn’t really changed.
The employee portion of a paycheck already has tax withholding taken out of it, so the ones seeing the biggest changes during this time are employers. A deferred amount of taxes may help employers stay afloat, for example.
The Bottom Line On Payroll Tax Relief
While payroll tax relief helps the average worker, since taxes are removed prior to them receiving their paycheck – they may have barely noticed the different. Whether Biden or Trump is president, they still go to the same job, and have to pay taxes to the same IRS.
Since the coronavirus has been an unprecedented development in American history, lawmakers have been doing their best to help the average American worker avoid conflicts with the IRS. Even though you may not have noticed much different with payroll tax relief, it is just one more measure that the government implemented, to help the average American recover during this difficult time.
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