- President Donald Trump signed an executive order calling for a temporary deferral of the employee side of the payroll tax. It would apply to workers who make no more than $4,000 per biweekly pay period or $104,000 annually.
- Companies and employees currently split the tax. Each covers a 6.2% Social Security tax and a 1.45% Medicare tax. Self-employed people are responsible for both shares and pay this levy, as well as estimated income tax, quarterly.
- Trump’s executive order didn’t specifically call out the self-employed as qualifying for this relief. The safest course of action for now might be to watch, wait and continue setting aside that money for quarterly payments.
Self-employed individuals shouldn’t depend on the payroll tax break President Donald Trump has released via an executive order– a minimum of not yet, tax professionals stated.
Payroll taxes are normally shared by companies and employees. Each covers a 6.2% tax to money Social Security, along with a 1.45% tax to money Medicare.
Self-employed individuals foot the entire expense for these levies themselves– a self-employment tax that totals 15.3%– and pay for them as part of their quarterly approximated taxes.
Trump’s executive order would suspend the worker’s share of payroll taxes from Sept. 1 through the completion of the year. It would cover workers who make no more than $4,000 per biweekly pay duration or $104,000 yearly.
The memo detailing the executive order was silent on whether this relief would use to the self-employed, which is now raising questions among tax professionals.
Those very same tax pros are currently facing whether companies or staff members could deal with surprise tax consequences and compliance problems associated with the executive order.
“I would guess that based upon this memo, they would more or less punt it to the Treasury Department to find out how it looks for self-employed taxpayers,” said Tony Nitti, Certified Public Accountant and partner at RubinBrown in Denver.
“However the fact is that what we don’t understand about the memo that was launched is far higher than what we do understand, and everybody is relaxing with bated breath, waiting for what it means,” he said.
Unpredictability around the executive order
Payroll tax service providers and companies have about three weeks until the executive order works.
Trump has ordered the Treasury Department to roll out assistance to put the recommendation in location and to “explore opportunities, consisting of legislation, to remove the commitment to pay the taxes deferred pursuant to the execution of this memorandum.”
With so many unanswered concerns– especially the unpredictability on whether that liability may be forgiven– accountants are advising that self-employed individuals continue to set aside their self-employment taxes and pay them as usual.
Indeed, they already have third-quarter quotes showing up on Sept. 15. First- and second-quarter payments were postponed to July 15, and fourth-quarter payments are due on Jan. 15, 2021.
“We depend on tax estimates so that we can make excellent monetary forecasts; we do not wish to dip into next year’s capital to cover this year’s liability,” said Sheneya Wilson, Certified Public Accountant and creator of Fola Financial in New York.
“If they can afford to make the estimated payments, let’s do it,” she stated.
At the minimum, self-employed people will desire to wait up until further assistance comes out on whether they even certify to defer this slice of the tax.
“Payroll taxes and concerns related to it aren’t the most convenient things to repair, so you’ll save yourself an administrative headache if you sit and wait,” said Dan Herron, a Certified Public Accountant and primary at Elemental Wealth Advisors in San Luis Obispo, California.
Hesitation around deferral
Separately, entrepreneurs, including independent specialists and freelancers, are currently eligible to postpone the company’s side of the Social Security tax via the CARES Act.
Under this provision, companies may select to defer the share of tax that would have been paid from March 27 through Dec. 31. They would then pay 50% of the amount owed next year and the rest in 2022.
Even tax professionals are skittish about suggesting this for the entrepreneur and the self-employed.
Capital might be constrained next year, and kicking the can down the road might be more problem than it deserves.
“I believe everyone is continuing as usual; you do not desire that big liability to accrue,” said Brian Streig, CPA, and tax director at Calhoun Thomson & & Matza in Austin, Texas.
“What occurs if you do lack money before you paid those taxes?” he asked. “Do you desire that danger that you’ll still need to pay?”