Last September, a presidential memorandum was issued that allowed the deferral of the withholding, deposit, and payment of the employee portion of the Social Security tax.
The executive order went into effect September 1, 2020, and guidance issued by the IRS placed the responsibility of deferral and repayment on employers.
Here’s what you need to know:
Only Certain People Qualified
First, the deferral applied to those whose bi-weekly pay was less than $4,000 (pre-tax) during the eligible period, from September 1, 2020 through December 31, 2020. This is an annual equivalent of about $104,000.
Deferral Isn’t Forgiveness
Eligible taxpayers are still expected to pay applicable taxes. The recent Consolidated Appropriations Act, extended the period throughout the entire year. Employers will have until December 31, 2021 to collect and repay outstanding taxes.
There May Be Penalties
If these taxes remain unpaid, interest, penalties, and additions will begin to accrue on January 1, 2022. If needed, employers can arrange to collect the outstanding amount from the individual. This may occur, for example, if the employee has left the company.
2021 Finances May Be Impacted
If the Payroll Tax Deferral impacted you, consider how the change affected your future paychecks. While you may have seen an increased take-home pay in 2020, your paycheck will be reduced when repayment begins and you’ll be paying twice as much in Social Security tax.
In a matter of months, a lot can change. As of now, we don’t know if events like a job loss or reduced income will have any impact on repayment. If you’re forced into deferral, it may be best to examine your budget and save if you’re able to.