Oftentimes, payroll can be one of the most significant expenses of a company, especially if you have many employees. It would be best to know how much you are going to pay, as it is one of the company’s most significant expenses; however, there is something that happened recently that some business owners may have missed. The CARES Act passed by US Congress earlier this year has included within it a payroll tax deferment.
But what exactly is payroll tax deferment? In essence, it allows employers to defer paying the regular 6.2% portion of the Social Security tax from their workforce’s paycheck. This move by the US government is aimed to provide employers with much-needed relief during the COVID-19 pandemic. The deferral of payroll taxes will allow the employer to keep more money in the short-term; however, it will have implications down the line and impact the business and the employees, depending on how they act on it.
While many business owners may jump to take advantage of the deferment, it’s important to note that the payroll tax deferment is not complete forgiveness of the taxes owed. There will be a point in the future when the government will claim the deferred taxes. Hence, businesses that take advantage of the payroll tax deferment must assess the risk they’re taking on and their ability to pay off the deferred taxes in the future, as not doing so may result in additional penalties and interest charged by the government.
How Payroll Taxes Work
Payroll taxes are the taxes that employers are required to withhold from their employees’ paychecks. They are also known as “employment taxes.” Payroll taxes go to fund programs such as Social Security, Medicare, unemployment insurance, and federal and state income tax withholding.
One of the most significant payroll taxes is Social Security tax – a federal tax that helps to fund Social Security retirement, disability, and survivor benefits. Social Security tax is calculated at 6.2% of an employee’s total wages, up to a certain amount each year. Employers are also responsible for paying a matching amount of Social Security tax.
Another significant payroll tax is Medicare tax – a federal tax that helps to fund Medicare, a federal health insurance program for people 65 and older or with qualifying disabilities. Medicare tax is calculated at 1.45% of an employee’s total wages, and employers are responsible for paying a matching amount of Medicare tax.
Types of Payroll Taxes
Payroll taxes are a form of tax that employers must pay on behalf of their employees. The taxes are deducted from the employee’s paycheck and remitted to the government by the employer. There are several different types of payroll taxes that employers must pay, including:
- Federal Income Tax
- Social Security Tax
- Medicare Tax
- State and Local Income Taxes
The Federal Income Tax is a tax on the employee’s income. The amount of tax owed is based on the amount of money the employee earns and their tax bracket. The employer is responsible for deducting the appropriate amount of Federal Income Tax from the employee’s paycheck and remitting it to the government.
The Social Security Tax is a tax that funds the Social Security program. It is a federal tax that is based on a percentage of the employee’s wages. The employer is responsible for deducting the appropriate amount of Social Security Tax from the employee’s paycheck and remitting it to the government.
The Medicare Tax is a tax that funds the Medicare program. It is a federal tax that is also based on a percentage of the employee’s wages. The employer is responsible for deducting the appropriate amount of Medicare Tax from the employee’s paycheck and remitting it to the government.
State and Local Income Taxes are taxes that are imposed by state and local governments. The amount of tax owed is based on the employee’s income and the tax rates that are in place in their state and local jurisdiction. The employer is responsible for deducting the appropriate amount of state and local income taxes from the employee’s paycheck and remitting it to the government.
| Tax Type | Percentage of Wages |
|---|---|
| Federal Income Tax | Varies based on tax bracket |
| Social Security Tax | 6.2% |
| Medicare Tax | 1.45% |
| State and Local Income Taxes | Varies by state and local jurisdiction |
Knowing the different types of payroll taxes that employers must pay can help businesses stay in compliance with government regulations and avoid costly fines and penalties.
Who Pays Payroll Taxes
Payroll taxes are social security and medicare taxes that are collected from employers and employees. These taxes are mandatory and are submitted to the federal government to fund social security and medicare programs.
- Employers are responsible for withholding the employee’s share of social security and medicare taxes from each paycheck and submitting it to the government along with their own share of these taxes.
- Self-employed individuals are responsible for paying both the employee and employer’s share of payroll taxes.
- Employees are responsible for paying a certain percentage of their income as payroll taxes, which is deducted from their paychecks before receiving their wages.
There are certain exemptions and exclusions for payroll taxes based on age, income, and other factors, but in general, most employees and employers are required to pay these taxes.
Payroll Tax Deferral Explained
If you’re an employee or an employer in the United States, you’ve likely heard about payroll tax deferral. It’s been a hot topic lately due to its inclusion in the recent COVID-19 relief executive order signed by President Trump. But what exactly is payroll tax deferral, and how does it work? Let’s dive in.
What is Payroll Tax Deferral?
- Payroll tax deferral refers to a temporary delay in paying Social Security taxes for eligible employees.
- The deferred taxes will eventually need to be repaid, so it’s more like a loan than forgiveness.
- The deferral period runs from September 1, 2020, to December 31, 2020.
Who is Eligible?
Not all employees are eligible for payroll tax deferral. The eligibility requirements include:
- Earning less than $4,000 per bi-weekly pay period (or equivalent amount for other pay periods).
- The deferral is optional, so employees may choose not to participate.
How Does it Work?
Essentially, the employee’s portion of Social Security taxes (6.2% of their gross wages) is temporarily suspended for the deferral period. During this time, their take-home pay will increase since they’ll be paying less in federal taxes. However, this is just deferral, meaning employees will need to pay back the deferred amount at a later date.
Employers will need to keep track of the deferred taxes and add them back to their employees’ paychecks starting in January 2021. These increased withholdings will continue until the deferred taxes are repaid in full by April 30, 2021.
The Bottom Line
While payroll tax deferral may provide some temporary relief to employees struggling during the pandemic, it’s important to remember that the taxes will eventually need to be repaid. Employees who choose to participate should be prepared for the increased withholdings starting in January 2021. Employers should also carefully track the deferred taxes to ensure they’re properly repaid on time.
| Deferral Period | Amount Deferred | Repayment Period |
|---|---|---|
| September 1, 2020 to December 31, 2020 | 6.2% of employee’s Social Security wages | January 1, 2021 to April 30, 2021 |
Overall, payroll tax deferral is a temporary measure designed to provide some financial relief during these uncertain times. However, it’s important to fully understand the implications of participating and to plan accordingly for the increased withholdings starting in 2021.
Payroll Tax Holiday vs. Deferral
When President Trump signed the Executive Memorandum on August 8, 2020, he directed the Treasury Department to defer the withholding, deposit, and payment of the employee portion of the Social Security taxes due between September 1, 2020, and December 31, 2020. The payroll tax holiday is essentially a temporary suspension of the payroll tax obligation. While the deferral of payroll taxes is also a temporary measure, it is different from the payroll tax holiday.
- The Payroll Tax Holiday is also called “payroll tax cut” or “payroll tax suspension” because it eliminates the payroll tax obligation for a certain period, usually a year or less. During the payroll tax holiday, employers and employees are not required to contribute to Social Security and Medicare, and the funds are not withheld from employee paychecks.
- The Payroll Tax Deferral, on the other hand, means that the employer and employee contribution to Social Security will not be forgiven, but rather postponed. Employers are required to withhold and deposit the employee’s share of Social Security taxes, but payment is deferred until a later time. The deferred taxes will be collected from employees’ paychecks from January 1, 2021, to April 30, 2021.
The Payroll Tax Deferral applies only to employees whose biweekly pay is less than $4,000 or an equivalent amount of $104,000 annually. The deferral applies to Social Security taxes, but not to Medicare taxes.
It’s important to note that the Payroll Tax Deferral is not forgiveness, and employees who take advantage of this deferral will have to repay those deferred taxes at some point in the future. Workers who agree to defer their payroll taxes may have to pay twice as much in Social Security taxes for four months starting January 2021.
| Pay Period | Timeframe | Effective Dates |
|---|---|---|
| Pay Period 17 | 08/23-09/05 | 09/01-09/12 |
| Pay Period 18 | 09/06-09/19 | 09/13-09/26 |
| Pay Period 19 | 09/20-10/03 | 09/27-10/10 |
| Pay Period 20 | 10/04-10/17 | 10/11-10/24 |
| Pay Period 21 | 10/18-10/31 | 10/25-11/07 |
| Pay Period 22 | 11/01-11/14 | 11/08-11/21 |
| Pay Period 23 | 11/15-11/28 | 11/22-12/05 |
| Pay Period 24 | 11/29-12/12 | 12/06-12/19 |
If you are an employee and you qualify for the Payroll Tax Deferral, you should be aware of the repayment plan that will be effective between January 1, 2021, and April 30, 2021. If your employer informs you that you will have to pay twice as much in Social Security taxes for those four months, you may want to consider whether deferring payroll taxes is worth it.
IRS Guidance on Payroll Tax Deferral
The payroll tax deferral is a program that was introduced by President Trump to provide relief to employers and employees during the COVID-19 pandemic. The program allows employers to defer the payment of certain payroll taxes that are due between September 1, 2020 and December 31, 2020. While it may seem like a good idea to defer the payment of these taxes, it is important to understand the guidelines provided by the IRS before making any decisions.
Guidelines on Payroll Tax Deferral
- The payroll tax deferral is optional. Employers can choose to participate in the deferral program, but it is not mandatory.
- The payroll taxes that can be deferred include the employee’s share of Social Security taxes (6.2% of wages) and the employee’s share of Tier 1 Railroad Retirement taxes (1.45% of wages).
- The deferral applies to all employees, regardless of their income level or type of employment.
- The deferral only applies to taxes that are due between September 1, 2020, and December 31, 2020.
- The deferred taxes must be paid back in two installments. The first installment is due by December 31, 2021, and the second installment is due by December 31, 2022.
- If an employer participates in the deferral program but fails to pay back the deferred taxes on time, they may be subject to penalties and interest.
Considerations before Participating in Payroll Tax Deferral
Before deciding to participate in the payroll tax deferral program, there are several key considerations for employers to keep in mind. First, while the program may provide some temporary relief, it is not a permanent solution to financial difficulties caused by the pandemic. Second, employers must carefully evaluate their ability to pay back the deferred taxes in the future without creating additional financial strain on their business. Finally, there may be unintended consequences to participating in the program, such as decreases in Social Security retirement benefits for employees.
Conclusion
The payroll tax deferral program can provide some much-needed relief to employers and employees during the COVID-19 pandemic. However, before making any decisions about participation in the program, it is important to carefully consider the guidelines provided by the IRS and the potential consequences of deferring these taxes. Through thoughtful evaluation and planning, employers can make an informed decision that is in the best interest of their business and their employees.
| Month | Due Date for Deferred Payroll Taxes |
|---|---|
| December 2020 | December 31, 2021 |
| December 2021 | December 31, 2022 |
Note: The information presented in this article is intended for general information purposes only and should not be construed as legal or financial advice.
Pros and Cons of Payroll Tax Deferral
While the payroll tax deferral may seem like an attractive solution to save on immediate finances, it comes with its own set of pros and cons that are worth weighing before making a decision.
- Pros:
- The obvious benefit is that it provides immediate relief to businesses and individuals during times of economic uncertainty or instability.
- Retaining cash flow allows for more investment and financial flexibility in the present, giving companies and households more control over financial decisions.
- For smaller businesses, it can be an opportunity to keep employees on the payroll who otherwise would have been let go due to the current economic environment.
- Cons:
- The deferred taxes will eventually need to be paid, potentially leading to larger tax bills in the future. This could create additional financial strain in the long run.
- The initial relief may be short-lived, as the deferred payroll taxes would need to be repaid between January 1 and April 30, 2021, creating an added expense that could affect businesses and individuals’ financial wellbeing.
- There is no guarantee that the deferral will be forgiven, meaning individuals and businesses may need to pay the deferred taxes regardless of their current financial situation.
Impact on Social Security and Medicare
The payroll tax deferral also has significant implications for Social Security and Medicare, as these programs rely on payroll taxes to fund their operations. Long-term deferral of these taxes could jeopardize these programs’ sustainability and put future benefits at risk.
Possible Alternatives
While the payroll tax deferral may seem like a simple solution to immediate financial stress, it is important to consider other options for financial relief, such as government stimulus programs or adjusting budgetary expenses, before resorting to deferring tax payments. Seeking financial guidance from a tax professional is also recommended to assess individual circumstances and options.
Comparison of Current Payroll Tax Deferral Policy
| Current Policy | Original Deadline | Deferred Deadline |
|---|---|---|
| Employer’s portion of Social Security tax (6.2%) | Due March 31, 2020 | Due December 31, 2021 |
| Employer’s portion of Railroad Retirement Act tax (1.45%) | Due March 31, 2020 | Due December 31, 2021 |
| Self-employed Social Security tax (12.4%) | Due April 15, 2020 | Due December 31, 2021 |
| Self-employed Railroad Retirement Act tax (2.9%) | Due April 15, 2020 | Due December 31, 2021 |
The payroll tax deferral applies only to payroll taxes for wages paid between September 1 and December 31, 2020, and only to individuals earning less than $4,000 on a biweekly payroll period. Repayment of deferred taxes would occur between January 1 and April 30, 2021.
In summary, while the payroll tax deferral may offer immediate financial relief, it is essential to weigh the pros and cons and consider long-term implications before making a decision. Other alternatives and seeking professional financial guidance can also be helpful in determining the best course of action.
FAQs About Payroll Tax Deferment
1. What is payroll tax deferment?
Payroll tax deferment is the temporary delay of paying certain payroll taxes, including Social Security taxes, that employers can choose to participate in.
2. Who is eligible for payroll tax deferment?
Employers, including self-employed individuals, that have employees with Social Security taxes withheld from their paychecks are eligible for payroll tax deferment.
3. When does the payroll tax deferment period begin and end?
The payroll tax deferment period began on September 1, 2020, and ended on December 31, 2020. However, employers who opted into payroll tax deferment during this period are required to repay the deferred taxes by specific deadlines.
4. How does payroll tax deferment work?
Instead of paying the full amount of Social Security taxes owed from employee paychecks, employers who participate in payroll tax deferment withhold a portion of those taxes and pay the remaining balance at a later date.
5. Will participating in payroll tax deferment affect my employees’ Social Security benefits?
No, participating in payroll tax deferment will not affect your employees’ Social Security benefits. It only changes when the employer pays the taxes owed to the government.
6. What happens if I don’t repay the deferred payroll taxes by the deadline?
Employers who do not repay the deferred payroll taxes on time may be subject to penalties and interest charges.
What is Payroll Tax Deferment? A Simplified Explanation
We hope this article has helped you understand what payroll tax deferment is and how it works. Remember, payroll tax deferment is a temporary delay in paying certain payroll taxes, including Social Security taxes. Employers who choose to participate in the program withhold a portion of Social Security taxes from employee paychecks and pay the remainder at a later date. It’s important to note that the payroll tax deferment period began on September 1, 2020, and ended on December 31, 2020. We thank you for reading and invite you to come back for more informative articles in the future.