You would still owe your payroll taxes under the terms of the president’s memorandum, and so would your employer, if you have one. What might change would be when some of the taxes for the period from Sept. 1 to Dec. 31 are due.
If you are not self-employed, what usually happens is that your employer pays half of the 12.4 percent in Social Security payroll taxes that most people owe and then withholds the other half from your paycheck. For the four months that are now in question, the withholding of the employee share — 6.2 percent — would stop, which means you would see more money in your paycheck.
This would only be true, however, for people who earn under $4,000 every two-week pay period, according to the memorandum, or about $104,000 a year. Those who earn more than that would still be subject to withholding, up to the annual limit of $137,700. And because the cap is per individual and not per household, two-income families who are well into the higher income tax brackets might have at least one working adult qualify.
At some point soon, the Internal Revenue Service will presumably issue guidance saying when the money is due, under what the White House is calling a “deferral” of these taxes. But the order also states that the Treasury Department shall “explore avenues, including legislation, to eliminate the obligation to pay the taxes deferred.”
Such a measure would face long-shot odds. Meanwhile, pity the payroll processors who have to interpret the memorandum. Mike Trabold, director of compliance at Paychex, outlined a number of scenarios in an interview. Employers could decide to be conservative and continue to withhold on their employees’ behalf. Or employers could stop withholding the money starting Sept. 1, and let those workers deal with the consequences of potentially owing money later, assuming the taxes eventually come due.
Then, some employers might formally let some employees continue to withhold even if all the other workers are getting the extra money in their paychecks. Or an employer might try to do the reverse — say, give an enraged employee, perhaps one threatening to sue, the opportunity to take home the 6.2 percent extra, even if the company chooses to continue withholding on all other employees’ behalf.
Assuming the income cap is itself legal, Pete Isberg, vice president for government relations at another payroll specialist, ADP, said that employers would need some flexibility. After all, an employee might show up for a new job on Sept. 15 having already earned too much elsewhere to be under the income cap. Other employees have side income throughout the year. Still more of them may simply make adjustments via a W-4 withholding form on their own, no matter what sort of default withholding strategy their employer selects.