What are payroll taxes, and who pays them?
Payroll tax burden is supposedly split between employees and employers
One policy measure that's repeatedly appeared on President Trump's coronavirus stimulus wish list is a payroll tax holiday.
The president has proposed slashing the payroll tax rate for employees and employers to 0 percent, arguing it would help workers take home bigger paychecks. Critics say the cut would not help out-of-work Americans most in need of help and have warned it would hurt Social Security, which is already facing a budget deficit.
All employees and employers pay a 6.2 percent payroll tax on wages capped out at $137,700. Right now, an employee earning $50,000 per year would pay $3,100 in payroll taxes. That money goes toward specific programs like Social Security, health care, unemployment compensation and workers’ compensation. Workers also pay a Medicare tax of 1.45 percent.
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However, the burden is mostly carried by workers: According to the Tax Foundation, most employers send their portion of the tax to the government and then decrease workers' wages before paying them. The workers then pay their own 6.2 percent tax on the reduced wages.
"Payroll taxes are a significant source of government revenue, but the burden of the payroll tax and the government programs they pay for may not be entirely apparent to taxpayers, due to how the taxes are levied," the organization said.
Workers who earn more than $200,000 individually, or $250,000 if they are married and filing jointly, pay an additional 0.9 percent Medicare tax.
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Individuals who work for themselves pay 12.4 percent toward Social Security and 2.9 percent for Medicare.
Payroll taxes bring in more than $1 trillion in revenue annually; eliminating it would involve new borrowing on a spectacular scale. It would also represent a massive shift of the tax burden from people earning less than $137,700 to people making more than that. According to the Urban Tax Institute, a nonpartisan think tank, the largest tax burden for low-income households tends to come from the payroll tax.
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In 2011 and 2012, the Obama administration cut payroll taxes by 2 percentage points to 4.2 percent. It cost about $800 billion over the course of several years, according to an analysis published by the University of Pennsylvania’s Wharton School.
According to the analysis, a payroll tax cut, which is gradually distributed over the course of a year, has little impact on lower-income households.
“Households in the bottom 20 percent of incomes — those households with the highest willingness to spend their tax savings — would receive about 2 percent of the total tax cut, limiting the policy’s stimulus potential,” it said.