In August, President Trump issued an executive order deferring payroll taxes until December 31, 2020 to provide short-term relief to taxpayers due to the ongoing financial hardships resulting from the COVID-19 pandemic. The order goes into effect on September 1, 2020.
If you are an employee considering the tax deferral, it is important to be aware of the implications it may have on your paycheck.
Here is what you need to know:
- First, keep in mind the payroll deferral is not tax forgiveness. It is simply a holiday from the 6.2% employees pay toward Social Security. Employers and employees usually split the 12.4% tax that funds Social Security and 2.9% that supports Medicare. Without Congressional action, the deferral will not be permanent and will need to be paid back.
- According to recently released IRS guidance, employers will be responsible for collecting deferred tax beginning in January 2021. Any taxes not paid by April 30 will be subject to penalties, interest, and additional taxes.
- Employees who defer payroll taxes will have a temporary boost in take-home pay through the end of 2020, but paychecks will be smaller beginning in 2021 with additional taxes withheld to pay the deferred amount.
- The tax deferral pertains to employees with pretax biweekly pay below $4,000.
- Seasonal employees should pay special attention to developing guidance as the full effect of the tax deferral is unknown for individuals who may not continue work at the same location after December 2020. One concern is that deferred tax will be withheld in a lump sum, which will have a significant impact on that individual’s final paycheck.
- Employers will have the liability of collecting the deferred taxes. Both employers and employees must consider the future implications of the tax holiday. While employers may not want to look like they are not offering a perceived savings, employees must also be aware of the potential tax hit in 2021 when the deferred payments are due.
- Any employee considering taking the tax deferral should consider cash flow planning and determine whether the short-term savings is worth the decline in future take-home pay.
Guidance is constantly changing, so please contact a tax professional with questions or concerns about the payroll tax deferral. The tax professionals at Rodefer Moss can help you determine the best plan for your unique situation. Contact us today.Share