Being your own boss is a challenge even in good times. Now, with the COVID-19 pandemic disrupting your personal and professional life, keeping your individual enterprise operating is particularly dicey.
So you probably were thrilled when Donald J. Trump took executive action last weekend to establish a temporary payroll tax holiday.
Since you’re both the boss and employee, that means that you pay both those components of the Federal Insurance Contributions Act (FICA) payroll taxes. Getting to hold off paying at least some of your employee portion certainly could help with your cash flow.
Or not.
Right now, Trump’s executive applies only to the Social Security part of FICA that’s paid by those who work for others.
Tax code specificity: At issue is the executive memo’s cite of taxes paid under Sec. 3101(a) of the Internal Revenue Code (IRC). This is the tax law that set the Social Security tax rate at 6.2 percent for individuals who get their salaries from someone else.
Tax law also mandates that the employers of these workers also match that 6.2 percent employee payroll tax amount.
Companies were given the option under the previously enacted Coronavirus Aid, Relief and Economic Security (CARES) Act to defer their portion of this Federal Insurance Contributions Act (FICA) withholding. Those taxes can be paid in stages in 2021 and 2022.
Trump’s recent executive memo was seen as an extension of this pro-business relief to employees.
Unfortunately, the document was a bit imprecise, meaning millions of self-employed workers were overlooked.
Benefits for all workers: Social Security and Medicare, the two popular federal benefits programs for seniors that are funded by FICA, are available to all workers who’ve paid into the systems.
That includes those who are salaried employees and have payroll taxes taken out of their wages, as well as entrepreneurs who work for themselves.
To ensure that the self-employed pay into and therefore are eligible for Social Security and Medicare, tax law requires them also to make payroll tax payments. Since the self-employed are both employers and employees, they pay both FICA components as mandated by IRC Sec. 1401(a).
That provision requires self-employed individuals to pay the full 12.4 percent of their earnings — 6.2 percent as boss and 6.2 percent as employee — toward Social Security. Those payments typically are made by regular estimated tax payments.
But Trump’s recent executive action deferring the employee part of the Social Security payroll tax ignored these combo boss/employees. The memo did not cite Sec. 1401(a), meaning that self-employed workers do not qualify for the temporary COVID-19 tax relief.
“Maybe they intended to do that and they just hadn’t added that in,” Garrett Watson, senior policy analyst at the Tax Foundation, told the Capitol Hill newspaper Roll Call. “Strictly speaking, reading the memoranda, it’s not in there.”
Millions missing: The failure to specifically include self-employed folks in the memo means more than 15 million self-employed taxpayers, based on Bureau of Labor Statistics July data, are left out — right now — of this potential piece of presidential coronavirus relief.
That’s a lot of potential voters. So it’s no surprise that Trump Administration economic advisor Larry Kudlow is trying to ease these workers’ concerns.
Kudlow, speaking to reporters earlier today at the White House, said a “technical change” would have to be issued to Trump’s memo on payroll tax deferral to include self-employed workers also obtain the relief.
Kudlow, however, did not elaborate.
I expect Kudlow and/or Treasury Secretary Steven Mnuchin soon will be providing the necessary addition of the official IRC section. To borrow a phrase that their boss, a former reality television show star, is fond of using, stay tuned.
From a practical tax standpoint, however, if you’re not too cash-strapped, it’s probably a good idea to still cover your self-employment payroll taxes.
I know I will count the full 12.4 percent payment when I figure my upcoming estimated taxes. That next payment, for 2020’s third quarter, is due in just a little more than a month, Sept. 15.
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