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What you need to know about the payroll tax deferral

The government has given some employees the chance to have a little extra cash in their paychecks—but only for now.

What you need to know about the payroll tax deferral
[Photo: Karolina Grabowska/Pexels]

If your next paycheck is a little bigger, you can thank the government—for now. But don’t get too comfortable with that extra spending money.

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On Tuesday, the Internal Revenue Service issued guidance on an early August executive order issued by President Donald Trump. The order directed the U.S. Treasury to allow employers to stop collecting Social Security and Medicare payroll taxes through December 31 for workers making less than $4,000 on a biweekly basis (roughly $104,000 per year).

Who benefits?

Employers generally pick up half the tab of their employees’ Social Security and Medicare payroll taxes. Social Security taxes are 12.4% of your gross pay up to a certain annual threshold ($137,700 in 2020), and Medicare taxes are 2.9% (no threshold). So, the deferral will put half of those obligations back in your check per pay period if you qualify. That’s about $90 per week for someone making about $62,000 per year, he says.

But here’s where it gets tricky: The tax obligation is simply deferred, not forgiven, so your employer will need to collect those remittances after the first of the year. Each employees’ tax obligation needs to be paid by April 30, 2021, or accrue steep penalties and interest. That means that your take-home pay in early 2021 will likely shrink as your employer collects double what you would typically owe.

Plus, the move doesn’t really give anyone a real benefit, says Christian Brim, CEO of Core Business and Financial Services, a business consulting firm. The CARES Act already allowed employers to delay paying Social Security taxes they collect. Employers who collected the employee’s Social Security obligation between March 27 and December 31, 2020, can delay paying half of that total until December 31, 2021, and the other half until December 31, 2022.

“For employees, [the payroll tax holiday] is at most a six-month interest-free loan with nasty penalties and interest if not paid back by April 30. For employers, there is no additional benefit in the order, since the CARES Act already provided relief for the employer portion of the taxes,” Brim says.

Other considerations

There are other issues and complications, says certified public accountant Tom Wheelwright, CEO of WealthAbility, a financial education platform, and author of Tax-Free Wealth: How to Build Massive Wealth by Permanently Lowering Your Taxes. Self-employed people won’t get a break unless they set up a company, pay themselves a regular paycheck, and deduct withholding.

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Plus, what if the employee takes advantage of the tax deferral and then leaves before the employer is able to recoup the amount? The employer is on the hook for the remittance regardless of whether they collected the tax from the employee or not. “It would be a good idea for employers to consult an attorney and have an agreement with employees about how the money would be paid back if they leave,” Wheelwright says. “I wouldn’t offer it to my employees.”

But that leads to another question, Brim says: Do employers need to comply if an employee asks them to forego withholding those taxes? The guidance does not make that clear, he says. And payroll services and software companies need to catch up. As of last week, Brim’s payroll provider was not equipped to handle the change in withholding, he says.

But the bottom line is that “it’s just kicking the can down the road,” Wheelwright says. “You have to know that this is a loan. It’s not money you can spend without risk.” Both Brim and Wheelwright agree that more guidance is needed to clear up such lingering questions.

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About the author

Gwen Moran writes about business, money and assorted other topics for leading publications and websites. She was named a Small Business Influencer Awards Top 100 Champion in 2015, 2014, and 2012 and is the co-author of The Complete Idiot's Guide to Business Plans (Alpha, 2010), and several other books

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