As concerns circulate about a potential recession, President Donald Trump insists that the economy remains healthy. Despite those assertions, there have been rumblings that White House officials are exploring the possibility of a temporary payroll tax cut to put more money in the hands of consumers.
According to reports, economists inside the White House have drafted a white paper about the potential for a payroll tax cut. Earlier, a White House official released a statement saying that “more tax cuts for the American people are certainly on the table, but cutting payroll taxes is not something under consideration at this time.” However, President Trump confirmed to reporters that payroll tax cuts are on the table, along with those rumored potential changes to capital gains, saying, “I’ve been thinking about payroll taxes for a long time. Many people would like to see that.”
If the back and forth sounds familiar, it echoes themes from an earlier time. The last payroll tax cut for American workers – also controversial – was pushed through by the Obama administration in 2011, despite concerns that the cut would increase the federal deficit. The theory was that the benefit would offset any costs: the cut was intended to kickstart the economy following the 2008 recession. After the first round, Congress renewed the temporary payroll tax cuts in 2012.
Here’s how the payroll tax cuts worked. Wages and self-employment income are subject to Social Security and Medicare taxes. Together, Social Security and Medicare taxes are known as FICA (Federal Insurance Contributions Act) taxes and are taken right out of your paycheck. Taxes on self-employment income are separately referred to as SECA (Self-Employment Contributions Act) taxes since self-employed persons pay both the employee and employer contributions.
If you’re employed, you pay Social Security tax (6.2%) as the employee, and your employer also pays the same rate of tax (6.2%); again, if you’re self-employed, you pay both portions.
Unlike Medicare, Social Security taxes are subject to a wage cap. In other words, you pay Social Security taxes on your earnings until you hit a magic number. After that, your wages are no longer subject to Social Security taxes. For 2019, that magic number is $132,900. That means that whether you make $1,000 or $100,000, you will pay Social Security taxes on that income. But if you earn $132,901? You’ll pay Social Security taxes on $132,900, but not on the extra dollar. And if you earn $1,132,900? You’ll pay Social Security taxes on $132,900 but not on the extra million.
In contrast, all wages are subject to Medicare taxes. If you’re employed, you pay Medicare tax (1.45%) as the employee, and your employer kicks in tax at the same rate (1.45%). As before, if you’re self-employed, you’ll pay both portions. And, thanks to a change in the law which took effect in 2014, high-income taxpayers are also subject to a Medicare surtax (0.9%) tacked on to wages which exceed $200,000, or $250,000 for married taxpayers.
Your employer collects those Social Security and Medicare payments and remits them to the government on your behalf (or you pay them directly if you’re self-employed). These taxes are sometimes referred to as “trust fund” taxes and are credited towards your retirement benefits.
(You can find out more about trust fund taxes here.)
With that, here’s how the 2011 payroll tax cut worked. On the employer side, payroll tax contributions for federal purposes remained the same. On the employee side, payroll tax contributions for federal purposes were reduced by 2%: instead of paying in at 6.2% for Social Security taxes (up to the cap which was at the time, $106,800), contributions were 4.2% for Social Security taxes (still up to the cap). Self-employed persons also got a 2% reduction. Contributions for Medicare remained the same.
A similar payroll tax cut in 2019 could save top wage earners up to $2,658. Most full-time wage and salary workers would save in the neighborhood of $908, or about a week’s wages (based on data from the Bureau of Labor and Statistics for the quarter ending July 2019, downloads as a PDF).
Whether a payroll tax cut will become a reality is yet to be seen. However, discussions about more tax cuts are likely coming. National Economic Council Director Larry Kudlow told “Fox News Sunday” viewers, “Tax cuts 2.0, we are looking at all that.”