October 07, 2020
As many know, in March of 2020, the Coronavirus, Aid, Relief, and Economic Security Act, commonly known as the CARES Act, was signed into law by President Trump. As a part of this Act, employers received the opportunity to defer a portion of their payroll tax payments and pass that money on to their employees in order to put more money into their pockets and stimulate the economy. Unfortunately, this tax delay, which is supposed to run from September 1st until the end of 2020, left workers and their employers with plenty of unanswered questions.
What Are Payroll Taxes?
In order to understand how the payroll tax deferral works, you first need to understand the basics of payroll taxes in general. These are the taxes that your employer submits to the governor. The money is taken from your paycheck and sent to the Federal Government on a regular basis, sometimes twice a month, even though it’s deducted from you whenever you get paid.
These taxes are broken down into several categories. Most people see Social Security, Federal, and State taxes deducted from their wages. Depending on where you live, you may see regional, local, county, or other forms of taxes taken out as well. What matters most here are the first two – Social Security and Federal Taxes.
Every employee pays the full percentage of their Social Security taxes. This money is removed and sent to the government, where it’s used to calculate how much you’ll earn from Social Security once you retire. The other, Federal Taxes, are calculated slightly differently. Rather than paying the full amount of those taxes, you pay half, and your employer pays the other half. The payroll tax deferral provides you with a break. The problem is that you’ll owe the government that money later on.
How Did the Payroll Tax Deferral Come About?
The payroll tax deferral started as a way to inject money into the economy as a result of the COVID-19 pandemic. Back in March 2020, parts of the country started to shut down, asking residents to stay at home and “shelter in place,” only going out when absolutely necessary for groceries, medical appointments, etc. As a result, many businesses, such as bars, restaurants that couldn’t move to delivery or take-out only, retail stores, and non-essential companies shut down. Thousands of employees were laid off from their jobs and forced to file for unemployment.
As a result, the economy stalled, and the stock market began trending downwards. So, in order to develop a solution and prevent things from worsening, the Federal Government began looking for a way to help the economy rebound. The answer? They provided citizens with stimulus funds and came up with the payroll tax deferral. The theory is that when people have more money in their bank accounts, they’ll spend it and help businesses out, making everything trend in a positive direction once again.
How Does an Employer Defer the Employer’s Share of Social Security Tax?
Usually, an employer deducts the amounts owed from their employees and then sends the money, either weekly, bi-weekly, or monthly, to the Federal Government. If they choose to participate in the payroll tax deferral plan, everything works a little different. The amount of money they send in will be lowered, according to the new amounts owed for Social Security.
However, the way that the plan is written, employers have a few more options. For example, they can choose to defer the entire amount that they have due for Social Security during the selected time period. This means that if they have $20,000 due to the government for that particular quarter, they can hold off on sending it during the time of the deferral.
That money will still be due once the deferral period is over, but for now, it can serve as a cushion in their bank accounts, and also earn interest, if it’s an account that does so. This provides the company with some extra money, should they need it – although in the end, that money will be due, and if it isn’t paid on time, then penalties will be levied against it. It’s important to note that standard payroll taxes due to the Federal Government, state, and other local institutions will still be due as usual.
Do You Have Any Choice in Accepting the Deferral?
The payroll tax deferral is set up in a very specific manner. While employers have a choice as to whether or not they want to participate and pass the temporary tax savings on to their workers, their employees have no say in the matter. Although some companies may be receptive and not only ask their workers for their opinion on the matter but even take their advice into consideration, others may not. As a result, you may see the deferral in your paycheck, or you may not, but you have little control over your employer’s decision.
Since every company, regardless of its size, can participate in the payroll tax deferral plan, you will need to ask your employer, or at the very least, your human resources or payroll department, if they plan on taking the opportunity to temporarily give you and your fellow co-workers a little extra money in your pockets from now through the end of the year.
What Will You See in Your Paycheck?
To put it simply, employees will see a little bit more money in their paychecks, at least from September 1 through December 31, 2020, as long as their employers choose to participate in the payroll tax deferral. It won’t be a huge amount, as it only makes up half of the Social Security taxes due, or 6.2% of your gross (pre-tax) paycheck, but that small amount can add up quickly.
You’ll notice that the amount of your Federal taxes, as well as the other half of your Social Security taxes, and all other amounts due in taxes (state, local, regional, and so on) will still be deducted. However, even though 6.2% sounds small, that’s an extra $62 for every person who makes around $1,000 per pay period. Now, what could you do with an additional $62 or more dollars? Well, the government wants you to spend that money in order to stimulate the economy.
What Should You Do Now in Anticipation of Double Withholdings?
Receiving a larger paycheck is always a good thing. However, the downside occurs next year when that money must be paid back. In order for Social Security to not end up in financial trouble, the amount withheld from your paycheck and given to you must be returned to the government in the form of double withholding. This means that once the deferral period ends, every one of your paychecks will have an additional 6.2% withheld from it and sent to Social Security. For people who are barely scraping by, this can certainly be a problem. Though the government wants you to spend it, the best thing that you can do right now is save that extra money, or as much of it as possible, so that you have a financial cushion when the double withholding begins. If this isn’t something that is feasible for you based on your current budget, you have several months to cut your expenses in preparation of the extra withholding.
What If You Have Additional Questions About the Payroll Tax Deferral?
While the payroll tax deferral seems straightforward, in reality, it tends to be a bit more complicated. If you have any questions about the payroll tax deferral and are wondering how to handle sending in the money (if you’re an employer) or about paying back the money to Social Security next year (if you’re an employee), then it’s best to seek some expert tax advice from a professional. It’s never a good idea to attempt to go it alone when dealing with the Federal Government and taxes, as matters can be complicated. When in doubt, find a tax expert and ask questions, rather than face heavy fines and penalties.
If you have additional questions about the payroll tax deferral either from an employer or employee standpoint, the tax advisors at the Enterprise Consultants Group can answer your questions, discuss your rights, and provide actionable options. Please contact us online or at (800) 575-9284 today to schedule a free and confidential consultation to see how we can help you.
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