In 2020, economic news probably falls just behind health news at the forefront of most people’s day-to-day lives. It’s hard to ignore everything going on right now, from a pandemic to a public health crisis. However, while some of these events have ultimately blurred together, a few financial and economic events jump out. They have the potential to affect your savings and your financial future in general. For example, take President Trump’s Payroll Tax Cut.

The widely reported Payroll Tax Cut went into effect on September 1. Not only does it hold the potential to directly impact your paycheck right now, but also it carries some important fine print that could run the risk of leaving you with a hefty tax bill come next year. And in fraught financial times, you deserve to know where your money goes—and why—so that you can plan accordingly.

Explaining Trump’s Payroll Tax Cuts

A Brief History

Trump has periodically floated the idea of payroll tax cuts in some shape or form for a couple of years. However, the version of the tax cuts we saw him take action on certainly wouldn’t have existed prior to 2020. The driving factor this year, we probably don’t need to tell you: the coronavirus pandemic.

Yes, the looming public health crisis has played a major impact on the U.S. and world economies. And if you recall, in late April, Congress passed the CARES Act, a sweeping set of economic relief measures. In part, it offered economic relief payments, federal unemployment benefits, and loans and grants to businesses. We wrote about it a few months back, so we’d encourage you to take another look now.

However, despite the slow recovery of the economy as the pandemic persists around the world, Congress has been stuck in gridlock over the next round of relief. The totals and timing have sunk a number of recent measures. And last month, on August 8, President Trump stepped in with a handful of Executive Orders surrounding relief.

While some of them were fairly easy to implement (extending the student loan interest waiver and payment deferral), others clearly would come with challenges to implementation. And one of the measures was the following: Deferring payroll taxes through the end of the year.

What is a payroll tax cut?

At its base level, a payroll tax cut stops the collection of some wage-based taxes, called payroll taxes. For example, let’s focus on Medicare and Social Security.

When you receive a paycheck, the federal government places a 12.4% tax on your paycheck and directs that total toward Social Security. But you don’t pay the full total—half of it, or 6.2% of the tax bill, is owed by your employer. And any wages beyond $137,700 (as of 2020) won’t have this tax applied to them at all.

For Medicare, you and your employer split a 2.9% tax, or 1.45% each. And if you earn more than $200,000, an additional 0.9% Medicare tax applies to the wages.

Trump’s Payroll Tax Cut: The Basics

Because a payroll tax cut eliminates these taxes from your paycheck, the immediate impact for you is that your paycheck will be larger. This aims to provide economic relief differently than a single stimulus payment might. It adds potentially a few hundred or thousand dollars to each paycheck—rather than a one-time payment.

Who Receives It: Trump’s payroll tax cut defers Social Security taxes, but not Medicare, on compensation of less than $4,000 on a biweekly basis, pre taxes. So if you earn more than $104,000 in 2020, the tax cut likely doesn’t apply to you.

When It Applies: The tax cut kicked in on Sept. 1 and expires on Dec. 31. So four months of paychecks could potentially reflect the executive measure.

An Important Note: These taxes haven’t been forgiven, just deferred. That means that unless Congress or Trump pass some sort of measure to forgive these taxes, you’ll still owe your portion of those taxes. And if you haven’t prepared yourself for that possibility, you could find yourself in hot water with the IRS.

In interviews, Treasury Secretary Steven Mnuchin has suggested that if Trump is reelected, he will support legislation to forgive these taxes. But that’s really all we have to go off of here, so that leaves taxpayers in a pretty precarious position. Should your payroll taxes not be withheld, do you save them? And what should you do as a business owner to help your business both in the near and long term?

Payroll Tax Cut: What You Should Know as a Business Owner

As we understand it so far, the payroll tax cut is elective. So, as a business owner you have some leeway to determine whether or not you will participate in the payroll tax deferral. Of course, potential benefits and drawbacks abound, whichever decision you make.

For example, in a bind, deferring your payroll taxes might give you additional cash on-hand in the near-term. If your business has fallen on hard times this year amidst the economic slump, this could appear very attractive.

On the other hand, so far we don’t know for a fact that these deferred taxes will ultimately receive forgiveness. In which case, deferring your tax obligation might simply defer when your business struggles. Because leaving your businesses with a sizable tax bill next year might end up becoming a roadblock you can’t overcome down the line.

Payroll Tax Cut: What You Should Know as an Employee

Firstly, the payroll tax cut won’t affect you if you fall into a few specific categories. If you recall, this tax only applies to basic compensation from employment. So you won’t feel the tax cut if you receive government benefits or if you’re out of work. And that applies to a lot of people right now, with high unemployment rates due to coronavirus layoffs.

If you do receive regular wages, you should find yourself in a situation where your paycheck grows because your employer has decided to participate in the payroll tax cut. But they might not! In either case, you should ask your finance or HR department directly for guidance.

And just as an extra reminder, the payroll tax cut only defers your taxes—not completely eliminates them. Keep that in mind.

Taking the Cut in Stride

A lot of uncertainty still surrounds Trump’s payroll tax cut. So far, it seems few—if any—large corporations have taken the bait and participated. But for employers and employees alike, you need to have an understanding how it might potentially affect you and your finances. Only then can you make the decisions that are right for you.