DO YOU KNOW THE DIFFERENCE BETWEEN PAYROLL TAX AND INCOME TAX?
Donald Trump is pushing a payroll tax cut to help Americans while we deal with the Coronavirus outbreak.
If you’re a California employee looking at your pay stub, you will see that your employer has withheld money for the following taxes:
- Federal Income Tax
- Social Security Tax
- Medicare Tax
- CA State Income Tax
- CA SUI/SDI Tax.
Today you watched the news and you are excited about the tax savings but thinking “where is the specific payroll tax?” or you believe that all of these are your “payroll taxes.”
The Payroll Tax is comprised of the Social Security and Medicare taxes, otherwise known as the Federal Insurance Contributions Act (FICA) tax. The rest are considered income taxes or state taxes.
This Payroll Tax or FICA tax is unique because it is the only tax on your pay stub that is an “employer-employee tax,” meaning both you AND YOUR EMPLOYER pay it. Payroll taxes are based on a percentage of your wages:
- 6.2% of your wages up to $137,700 are paid by you and your employer for the Social Security tax.
- 1.45% of your wages up to $200,000 (single) or $250,000 (married) are paid by you and your employer for the Medicare tax. (On wages above these limits, the employee will pay an additional 0.9% for Medicare.)
The President said this payroll tax cut will benefit people in a meaningful way. Are you a Californian that this will benefit? Let’s look.
FREELANCERS & “GIG ECONOMY WORKERS” = ZERO BENEFIT
Forbes recently cited a survey estimating that there are an estimated 57 million American freelancers. https://www.forbes.com/sites/heidilynnekurter/2019/10/31/california-destroys-1-trillion-gig-economy-with-new-law/#511231be2f0d
While freelancers and gig economy workers pay income taxes, they don’t pay payroll taxes. This tax cut is of no benefit to these 57 million people!
SOCIAL SECURITY BENEFICIARIES = ZERO BENEFIT
According to the Center on Budget and Policy Priorities, over 60 million Americans collect Social Security benefits. 3% are young survivors, 16% are disabled workers and dependents, and the other 81% are retired workers, dependents, and aged widows (receiving retirement or survivors benefits). It is estimated that Social Security benefits keep between 10 to 15 million elderly Americans out of poverty. https://www.cbpp.org/research/social-security/policy-basics-top-ten-facts-about-social-security
These beneficiaries, if their total income is more than $25,000 for an individual, or $32,000 for a married couple filing jointly, pay income taxes on their social security benefits. https://www.aarp.org/retirement/social-security/questions-answers/how-is-ss-taxed/
But, they don’t pay payroll taxes. This tax cut is of no benefit to a large portion of these 60 million Americans!
UNEMPLOYED AND UNDEREMPLOYED = ZERO BENEFIT
Those who will become unemployed or have to take leaves of absence beyond their sick pay and or vacation pay because they have to stay home to take care of their kids who are off of school, or themselves because they are sick, or for a family member who is sick, do not pay payroll taxes while out of work. This payroll tax cut is obviously of no benefit to someone who loses their job in the coming weeks due to the Coronavirus and remains unemployed for the remainder of the year!
THE AVERAGE AMERICAN EMPLOYEE = $82.62 PER WEEK
Let’s take your average American wage earner at $27 per hour, 40 hours a week. Their gross pay is $1,080 per week. With the 7.65% payroll tax cut, this employee will save $82.62 per week. Is this the big difference Donald Trump was referring to?
BIG BUSINESS = HUNDREDS OF MILLIONS OF DOLLARS PER WEEK
Walmart employs 1.5 million Americans and remember the Payroll Tax is unique because the employer also matches what the employee pays, or in this case does not pay. So using the average American above, Walmart would save $123,930,000 per week! Is this the big difference Donald Trump was referring to? They do practice what they preach: “Save money. Live better.”
(Please remind me whether Walmart or the Walton Family is in the at-risk category of being anything besides super wealthy. By the way, the Walton Family’s estimated worth is approximately $200 billion, which looks like $200,000,000,000.00 in numerical form! Ironically, we’re bashing people as hoarders for buying too much toilet paper.)
Target employs 350,000 Americans. Using the average American above, Target would save $28,917,000 per week! Is this the big difference Donald Trump was referring to?
Walgreens employs 230,000 Americans. CVS employs approximately 280,000 Americans. Are these companies in danger of going out of business due to the Coronavirus? No, they can barely keep their shelves stocked right now.
(By the way, the Trump Organization is estimated to have about 22,000 employees.)
Now the average Walmart, Target, Walgreens, and CVS employee does NOT make $27 per hour, NOR do they work a 40 hour week, so that would decrease the dollar amounts above, but by what, half? Even if it is only half of the amounts above, one can easily understand why these companies are opening up their parking lots for Coronavirus testing and standing up with Trump, grinning ear to ear, realizing their bottom lines just grew by hundreds of millions of dollars this year.
(Assuming the average Walmart employee earned $13 per hour working only 25 hours per week, the savings would equate to $37,293,750.00 per week, or a $1,454,456,250.00 savings between April and December 2020.)
MEDICARE AND SOCIAL SECURITY = HUNDREDS OF MILLIONS OF DOLLARS LOST IN FUNDING PER WEEK
Also remember that these taxes directly fund Medicare and Social Security and that real people in need, not corporations, are the beneficiaries of these programs. Medicare and Social Security will receive a significant cut in funding as a result of this Payroll Tax holiday. Is this the big difference Donald Trump was referring to?
Looking at the plain meaning of his words in the Tweet at the top, he is not lying by saying that by supporting this you are doing something that is really meaningful and will make a big difference.
WHY NOT AN INCOME TAX CUT FOR AMERICANS INSTEAD OF A PAYROLL TAX CUT
The first retort is that it would only be effective at the end of the year and not provide immediate relief for people. But, remember the payroll tax cut only benefits the current employee, and that same employee also has a federal income tax withholding that can be cut as easily as the payroll tax. Furthermore, such an income tax cut down the road does help the gig economy workers, those social security beneficiaries that pay taxes, and those currently unemployed, whether by layoff, or underemployed due to caring for others or themselves by still having some income in the year 2020. All these people are having to adjust during this outbreak. An income tax cut would not directly hurt the Social Security and Medicare programs. But, such an income tax cut would not help big business.