Are Online Coaches helped by new Payroll Tax Cut?
There has been a lot of buzz about the Executive Order on Payroll Tax.
Let’s break down what this means for your online coaching business...
FOR STARTERS...WHAT IS PAYROLL TAX?
The tax that we pay to fund Medicare and Social Security.
These taxes are in addition to your Federal tax bracket and your state income tax bracket.
In total, this tax is 15.3%.
Since you are self-employed...you pay all 15.3%.
If you have employees...you pay half and you withhold the other half (7.65% each).
If your employee makes less than $104,000 per year, now you are defer withholding that 7.65% so its back in their paycheck... rather than withholding it and sending to the IRS.
MY 2 CENTS - 2 IMPORTANT COMPONENTS TO CONSIDER:
#1. TAX DEFERRAL - NOT TAX CUT
As the order is written now (8/11/20), this is NOT a tax cut. It is simply allowing the employer to delay paying the IRS until January of 2021.
So the question becomes....why would you even withhold it?
Since the tax is eventually due... you will need to get that money from your employee at some point.
For many business owners...That might be a challenging position to be put in.
You want to help your employees...but also not looking get stuck with the debt.
#2. NOT HELPFUL FOR SELF-EMPLOYED
Since you work for yourself...not too helpful.
As this is written currently, this is only applicable to employees. The section of the tax code impacted does not refer to you.
I will caution, this is brand new and tax professionals are awaiting guidance from Treasury Department on how to address this for their self-employed clients.
However, my opinion would be to continue putting this money aside.
It is not a tax cut and you will owe this money in a few months, so you should continue with setting aside self-employment taxes.
CONCLUSION:
I feel that this tax deferral is not very impactful.
If you are out of work because of Covid…you are not helped.
If you were an employee and you get back the 7.65% of wages…what will you do in January if they need to withhold 15.3% bc they owe back taxes + the normal ones?
To review...you still owe this money in January…so if you don’t withhold it…who will pay that tax bill when it comes due?
If congress turns it into a full cut, than I feel that employers will be comfortable sending those extra wages into the pockets of their employees.
Lastly, Social Security is under pressure as it sits today. Cutting funding to it, could lead to big problems down the road.
Those are my opinions...feel free to borrow them!
If you need help determining the best course of action for you and your staff, please schedule a 15-minute call.
Best
Pat
Disclaimer: This is meant to be educational only. This is NOT advice for your specific situation. Please speak to a qualified tax professional before making any changes to your tax withholding strategies.