How Trump’s Elimination of Payroll Taxes Impacts Medicare
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Recently, an executive order made by President Trump went into effect to eliminate payroll taxes. In light of the current global health crisis, payroll taxes will be forgiven for eligible employees through the end of the year. Many who receive Medicare benefits or will soon receive them wonder how this will affect the federal program.
What’s the Payroll Tax Deferral Executive Order
President Trump released a memorandum that directs the Secretary of the Treasury to postpone payroll tax obligations for certain employees. The time period for this suspension of taxes is four months. Employers will still pay into their share, and employees will need to pay back the tax dollars they saved. While it may seem like eliminating payroll taxes for a few months takes away from the Medicare program, these funds will be returned back to the government. Think of this as a loan; it’s money that stays in the pockets of the American people, but those people will eventually give it back. Now, not everyone will qualify. So, let’s go over the logistics.
Employees whose bi-weekly, pre-tax income is regularly below $4,000 are eligible for the payroll tax deferral. The President states that this will help American workers financially when needed the most. In the time of a global health disaster, a toll has been taken on the country’s economy. Leaving medium and low-income earners in a tough financial situation. In hopes to help assist those that could use a few extra dollars each check, the goal of this executive order is to bring money back into the economy. Essentially the belief is that the more money people have, the more they will spend. Now, keep in mind these funds will require a payback.
What Are the Current Payroll Tax Amounts in the United States?
In the United States, the payroll tax is divided halfway between employers and employees. The current rate is 12.4% of wages total (6.2% each way) for Social Security and 2.9% (1.45% each way) for Medicare. The Social Security tax wage base limit is $137,700, but there’s no such limit for Medicare tax. Although, singles earning over $200,000 do pay an additional Medicare tax.
How Does the Payroll Tax Deferral Executive Order Impact Medicare
As Trump’s executive order applies only to the employee’s taxes, the employer will still pay into Social Security and Medicare during this time. After the President’s order, the IRS stated that the deferred taxes must be paid back by April 30, 2021. Otherwise, the employee will pay penalties, interest, and other tax additions to make up the amount.
The purpose of this tax holiday is to provide short-term financial relief to American workers. To be clear, the money needed for Medicare and Social Security funds will be missing. In Trump’s run for reelection, some fear he’ll seek to make payroll tax cuts permanent. However, passing such legislation would require Congress’s approval. It would also likely not get much support due to potential adverse long-term effects on federal programs.
While it’s understandable that citizens fear the defunding of Medicare or Social Security, these programs aren’t going away just yet.
What Does Trump’s Executive Order Mean
If you’re on Medicare or are about to be, it’s understandable that you would have a concern when hearing about an upcoming payroll tax break. However, this is a short-term initiative that won’t cause the depletion of federal funds. If your bi-weekly, pre-tax income is less than $4,000, you could be eligible for the payroll tax deferment. Keep in mind that this is a temporary tax break. If you don’t pay the taxes for the rest of this year, you’ll have to pay them back in the first half of 2021. And, if you don’t make up for them then, you’ll have to pay even more in the future.
If you’re still working and are unsure if your payroll taxes will be suspended, ask your human resources department. As this is a short-term tax break that will require repayment soon, Medicare benefits shouldn’t be affected by the suspension.