Is a Payroll Tax Waiver Better than a Second Stimulus Check?
The Trump administration is in the talks for further economic support during these troubling times. Art Laffer, a member of President Trump’s economic recovery task force and a distinguished economist, has suggested that a payroll tax waiver may be an easy and effective way to further stimulate the economy.
What Is a Payroll Tax Waiver?
If you look at your pay stub you will notice a series of deductions before coming to the amount you will actually receive.
Two of those deductions or items are what is known as a payroll tax. They are usually listed as set forth below:
FICA SS TAX
FICA MED TAX
The Federal Insurance Contributions Act (FICA) has two components - Social Security and Medicare. FICA SS TAX refers to Social Security taxes and FICA MED TAX refers to Medicare taxes. The Social Security tax rate is 6.2% of your earnings up to a Social Security income threshold of $137,700 for 2020. If you earned $100,000 in 2020, you would pay $6,200 into Social Security.
The Medicare tax rate is 1.45% of your earning with not limit or threshold. Further, if your income exceeds $200,000, you will be subject to an additional 0.9% Medicare tax known as the “Additional Medicare Tax.” (not the most original name). Thus, a person making $100,000 in 2020 would pay $1,450 into Medicare. A person making $300,000 in 2020 would pay $7,050 into Medicare.
Putting both taxes together, an employee making less than $200,000 is paying a FICA tax of 7.65% on earned income. Your employer is also paying the same amount. If you are self-employed, you pay both the employer and employee components of the FICA tax.
A payroll tax credit would temporarily reduce one or both of those percentages up to a certain amount. Reduce taxes means a bigger paycheck and some relief for your employer. While the percentages sound small, a 50% reduction in these payroll taxes on someone making $100,000 a year would put an additional $3,825 in their pocket over the course of a year. What’s even more interesting is that Laffer has even suggested a negative payroll tax. A negative payroll tax would work similar to a waiver except a negative tax would mean you get additional funds as a percentage of your income. This would come from the payroll provider, not the IRS.
