Last month, the president issued a presidential memorandum that resulted in allowing 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 we know so far:
Only Certain People Qualify
First, the deferral isn’t available to everyone. A person’s bi-weekly pay should be less than $4,000 (pre-tax) during the eligible period, which is 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 executive order indicates tax payments will resume beginning January 1, 2021. Employers will have until April 30, 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 May 1, 2021. 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.
Employer Participation is Optional
Employers are allowed to stop withholding Social Security taxes for eligible employees but aren’t explicitly required to do so. Additionally, there is no guidance as to whether employers can give employees the option to opt out, according to SHRM.
2021 Finances May Be Impacted
If the Payroll Tax Deferral impacts you, consider how the change will affect future paychecks. While you may see an increased take-home pay this year, your paycheck will be reduced when repayment begins and you’re 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 the funds if you’re able to.