President Trump’s payroll tax deferral scheme that went into effect on Tuesday comes up woefully short of being a true tax holiday for households — more like a tax headache, experts argue.
“You’ll see a slight bump in the paycheck if the employer decides to defer the tax between now and the end of the year, but that’s going to come with a trade-off of a slightly lower paycheck between the end of January and April,” senior policy analyst at the Tax Foundation Garrett Watson told Yahoo Finance’s The First Trade.
As Yahoo Finance personal finance editor Janna Herron discusses, employees who make less than $4,000 biweekly can keep the 6.2% tax they would normally pay into Social Security under Trump’s executive order. It extends to Dec. 31 of this year.
The problem — and why the president’s action is being panned by folks on both sides of the political aisle — is employers have the liability to pay back the deferral. That means employers will be forced to withhold double the Social Security tax in paychecks from January to April for workers who sign off on a deferral, as Herron notes.
In other words, American workers may be in for paycheck shock to kick off 2021...likely alongside a time of great uncertainty on the jobs front post November’s presidential election. To be sure, that could have negative ramifications for consumers’ spending and ultimately, the stock market.
Explains Watson on Trump’s plan, “The IRS designed it so that it spreads out the repayment over time. But it’s very important for employees to know if the employer elected to defer the tax. Ideally employees would be able to decide whether or not they like this deferral or not. It will affect their financial situation in their net pay in the beginning of next year — it will be lower than otherwise expected, which may add harm and stress to households that aren’t expecting it.”
Watson’s research suggests tax holidays in and of themselves have proven less than effective in the past. So why bother with the headache, tax experts like Watson contend.
The most recent one in 2010 (pre-Trump), Watson notes, the employee-side payroll tax, was reduced to 4.2% from 6.2% for 2011 and 2012 to jumpstart the economy after the Great Recession. Watson’s findings indicate the tax holiday was mostly saved by U.S. households, limiting the stimulus effect on the economy.
Brian Sozzi is an editor-at-large and co-anchor of The First Trade at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.
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