As part of his administration’s response to coronavirus, President Trump has called for a cut in the payroll tax. But how much would suck a tax break save your clients?
Advocates claim the cut may be the best chance of avoiding a virus-related recession, pumping some $950 billion into the economy over the rest of the year. (The 2009 stimulus was $800 billion over more than two years.)
Trump wants to cut the Social Security payroll tax paid by workers and employers on the first $137,700 in wages to as low as zero through Dec. 31, said Tim Speiss, CPA/PFS and co-leader of the Private Wealth Group at EisnerAmper in New York. The Social Security payroll tax is a combined 12.4%. “With this payroll tax cut to zero, the employee and employer save a [potential] combined $17,075” annually, Speiss said.
By comparison, according to Speiss, in a previous cut, payroll tax contributions for federal purposes were reduced two percentage points on the employee side. Instead of paying in at 6.2% for Social Security taxes up to the cap, contributions were 4.2% for Social Security taxes (still up to the cap). A similar payroll tax cut now could save top wage earners up to nearly $3,000.
"A cut to zero would provide even greater cost savings,” he said, “but it’s not yet clear whether the zero percent would be in effect only up to a certain amount of earnings.”
Speiss said that a stimulus package would likely provide a greater benefit to lower-income earners who make less than $50,000 annually, a demographic more likely to spend extra cash on economy-stimulating goods and services than higher earners, who are more likely to save.
Critics and proponents have clashed about the cut’s potential benefits and Congress may never greenlight the idea. If the cut or some version of it does pass, it could mean more take-home pay now for clients but new challenges in the future.
“The payroll tax reduction is attractive for policymakers due to the speed and the ease of temporarily reducing for a set period of time,” said Julia Carlson, founder and CEO of Financial Freedom Wealth Management Group in Newport, Ore. “If the plan works to prevent a recession and build a stronger economy, there is a potential for generation of more tax revenue ... while the higher-income earners would be more likely to save or invest at these current attractive equity prices. That would help the markets and confidence.”
Opponents contend that the cut is an unrealistic effort to counter real economic struggles from coronavirus.
“This plan is misdirected. It won’t help those workers who are laid off or who have to be self-isolated or self-quarantined,” said Robert Seltzer, a CPA at Seltzer Business Management in Los Angeles. “If people are already working, then they don’t really need the help. For the employer, it’s not significant enough to help. A smarter use of money would be a stimulus package that would benefit the lower-income workers and those who have lost their jobs. Low- or no-interest loans to businesses would also help small businesses.”