Payroll tax deferral allows employees to temporarily stop paying a portion of their Social Security taxes, which are typically 6.2% of their earnings. This means that more of their paycheck is available to spend or save. However, the taxes that are deferred must be repaid eventually, either through increased withholding from future paychecks or when the employee files their tax return. It’s important to note that while deferring payroll taxes may provide temporary financial relief, it can also lead to a higher tax bill in the future.
## What is Included in a Deferral of of Federal Income and Social Security Taxes?
Employers are required to make contributions to federal income tax and Social Security (Old-Age, Survivors, and Disability Insurance) for their employees. Employers also make contributions to Medicare hospital insurance (hospital insurance, Part A). Generally, required federal income tax is 7.65 percent, Social Security taxes are 6.20 percent, and Medicare hospital insurance taxes are 1.45 percent.
As part of the CARES Act, the federal government has allowed businesses to defer paying the 6.20 percent employee share of Social Security taxes from March 27, 2020 through December 31, 2020. To elect to defer these payments, certain requirements must be met.
### **Employer Contributions**
In addition to making tax deposits, employers are required to make contributions for both the employee and employer shares of Social Security taxes and Medicare hospital insurance taxes. The rates for these contributions are one half of the employee tax rates. For Social Security, the employee rate is 6.2 percent, so the employer matches this with a contribution of 6.2 percent. For Medicare, the employee rate is 1.45 percent, and the employer also contributes 1.45 percent.
| Contribution | Employee | Employee |
|—————————-:| ———:| ———:|
| Federal Income Tax| 7.65% | N/A |
| Social Security (OASDI) | 6.2% | 6.2% |
| Medicare Hospital Insurance (HI) | 1.45% | 1.45% |
Employee Contributions
Employee contributions to eligible retirement plans, such as 401(k)s and 403(b)s, are also deferred under the payroll tax deferral.
- These contributions are made on a pre-tax basis, meaning they are deducted from an employee’s pay before taxes are calculated.
- This reduces the employee’s taxable income and the amount of income tax they owe.
| Contribution Type | Deferral Limit (2023) |
|---|---|
| 401(k) | $22,500 ($30,000 for those age 50 and older) |
| 403(b) | $22,500 ($30,000 for those age 50 and older) |
FICA Tax Deferral
The FICA tax deferral, enacted with the CARES Act in 2020, allows employers to delay withholding and depositing the employee portion of Social Security tax from employee paychecks from September 1, 2020, to December 31, 2020. This tax deferral applies to the 6.2% portion of FICA taxes withheld from employees, not the 6.2% portion paid by employers.
The deferred taxes are to be repaid to the IRS through additional withholding in 2021. Half of the deferred taxes will be repaid from January 1, 2021, to April 30, 2021, and the remaining half will be repaid from May 1, 2021, to December 31, 2021. If an employee leaves the company before the deferred taxes are fully repaid, the remaining balance will be taken from the employee’s final paycheck.
It’s important to note that not all employees are eligible for the FICA tax deferral. Employees who earn more than $4,000 per bi-weekly pay period are not eligible. Employers are also not required to offer the deferral to their employees.
Income Tax Deferral
The payroll tax deferral, enacted in August 2020, allowed employees to defer paying the employee portion of Social Security taxes (6.2%) on their paychecks from September 1, 2020, to December 31, 2020. This deferral was intended to provide financial relief to employees during the COVID-19 pandemic.
The deferred taxes must be repaid by April 30, 2021. Employees who do not repay the deferred taxes by this date will be responsible for paying the deferred taxes plus interest and penalties.
There are a few important things to keep in mind about the payroll tax deferral:
- The deferral is not a tax break. The deferred taxes must be repaid by April 30, 2021.
- The deferral only applies to the employee portion of Social Security taxes (6.2%). The employer portion of Social Security taxes (6.2%) and Medicare taxes (1.45%) are not deferred.
- Employees who are not eligible for Social Security benefits are not eligible for the payroll tax deferral.
- Employees who participate in the payroll tax deferral may see a reduction in their take-home pay.
Alright mate, that’s the wrap on what’s included in the payroll tax deferral. Remember, it’s a bit of a gamble, but you might as well take advantage if you can. If you need a refresher or want to look into other financial shenanigans, come back anytime! I’ll be here, holding down the fort, keeping you up to speed on all things money. Cheers!