On Saturday President Trump signed an executive order— one that is likely to see some legal challenges. The order includes language to extend enhanced unemployment benefits and eviction moratoriums, the deferment for student loans, student loan interest forgiveness and extend eviction moratoriums. However, for freelancers, the most important piece of this new order is that it could defer payroll tax obligations by 50 percent from August 1 through the end of the year if your freelance income is less than $104,000. This means instead of paying 15.30% in Medicare and Social Security taxes eligible freelancers will pay 7.65%.
The extended unemployment benefits are not a blanket renewal of the $600 FPUC program, but a reduction to $400, one-quarter of which is required to be paid by states. The extension is intended to be retroactive to August 1.
Deferments of student loans only apply to people with federal loans held by the Department of Education and the deferral of payments is not required, meaning if you can continue to pay off your loans, you likely should keep lowering your loan obligation. Again, the loan payments are not being forgiven, it’s just that collections are being temporarily suspended.
As far as the payroll tax goes, it may feel like a tax cut for a short period of time because you won’t technically have to pay the full freight on your self-employment taxes, but it is important to note that right now it is only a tax deferral, meaning the taxes will still be due at a later date, unless, as the language in the actual executive order intimates, The Secretary of the Treasury decides to pass legislation (and is successful in doing so), which could to eliminate the obligation to pay the deferred taxes.
Again, this order could be challenged in court, so don’t plan on a payroll tax holiday just yet. It is critical to understand that you will still have to pay the tax at some point if the end result of the executive order is just a deferral. You would just be postponing payment and avoiding late payment penalties if you choose this option, when and if it becomes available.
There may also be other changes to this executive order. As such, we will provide updates to this article as the situation evolves and will provide additional information as needed.
Jonathan Medows is a certified public accountant licensed in New York, New Jersey, Maryland, and Pennsylvania. He is also a recognized expert in taxation for freelancers and the self-employed—often tapped for his expert knowledge and perspective on self-employment taxation by national and regional publications such as The New York Post, BusinessWeek, Forbes taxation blog, WebCPA, CPA Practice Advisor, and others. You can read some of Jonathan’s press coverage here.
©2021 MEDOWS CPA, PLLC