Payroll Tax Deferment is a temporary suspension of collecting social security tax from employee paychecks. This means employees will have more money available in their paychecks. However, the taxes are not forgiven; they will need to be paid back between January 1, 2021, and April 30, 2021. Payroll Tax Deferment is an attempt to help people during the economic crisis caused by the COVID-19 pandemic.
Employee Eligibility Requirements
To be eligible for payroll tax deferment, employees must meet the following requirements:
- Be employed by an eligible employer, which is generally a state or local government or a tax-exempt organization.
- Have a valid Social Security number.
- Not be subject to the Alternative Minimum Tax (AMT).
- Not have claimed the standard deduction or itemized deductions on their 2020 federal income tax return.
- Not be enrolled in a high-deductible health plan (HDHP) with a health savings account (HSA).
Employees who meet these requirements may defer up to 8.55% of their bi-weekly pay from July 1, 2020, through December 31, 2020. The deferred taxes will be repaid over a period of up to three years, beginning in January 2021.
The table below provides a summary of the employee eligibility requirements for payroll tax deferment:
| Requirement | Description |
|---|---|
| Eligible employer | State or local government, or tax-exempt organization |
| Valid Social Security number | Required |
| Alternative Minimum Tax (AMT) | Not subject to AMT |
| Standard deduction or itemized deductions | Not claimed on 2020 federal income tax return |
| High-deductible health plan (HDHP) with a health savings account (HSA) | Not enrolled |
| Deferral amount | Up to 8.55% of bi-weekly pay from July 1, 2020, through December 31, 2020 |
| Repayment period | Up to three years, beginning in January 2021 |
Payroll Tax Deferment: Impact on Payroll Withholdings
Payroll tax deferment is a temporary measure that allows employees to postpone paying certain federal income taxes, including Social Security and Medicare taxes, on their wages.
Deferment Period
- The deferment period began on September 1, 2020, and was scheduled to end on December 31, 2020.
- However, the Taxpayer Certainty and Disaster Tax Relief Act of 2020 extended the deferment period to April 30, 2021.
Eligible Employees
- Employees who receive wages subject to Social Security and Medicare taxes are eligible for the deferment.
- Self-employed individuals are not eligible.
Repayment
The deferred taxes must be repaid in full by April 30, 2023. Employees will not be charged interest or penalties on the deferred taxes.
Impact on Payroll Withholdings
- During the deferment period, employees will see a decrease in their net pay as less federal income tax is withheld.
- After the deferment period ends, employees will see an increase in their net pay as the deferred taxes are repaid.
Example
An employee who earns $4,000 per month will see the following changes in their payroll during the deferment period:
| Period | Federal Income Tax Withheld |
|---|---|
| Before Deferment | $520 |
| During Deferment | $340 |
| After Deferment | $660 |
Payroll Tax Deferment Explained
Payroll tax deferment is a temporary measure implemented by the government to provide financial relief to individuals during the COVID-19 pandemic. It allows employees to postpone paying the 6.2% Social Security tax (commonly known as Old Age, Survivors, and Disability Insurance or OASDI) on their earnings from September 1 to December 31, 2020.
Potential Tax Consequences
While payroll tax deferment can provide short-term savings, it’s important to be aware of the potential tax consequences:
- Increased Future Tax Burden: The deferred taxes will need to be repaid from January 1 to April 30, 2021, which means employees will have to pay an extra 12.4% (double the original 6.2%) during this period.
- Impact on Benefit Calculations: The lower taxable income due to deferred taxes may affect the calculation of Social Security benefits in the future, potentially reducing them.
- Repayment Penalty: If employees fail to repay the deferred taxes by the April 2021 deadline, they may face penalties and interest charges.
To mitigate the impact of these consequences, it’s recommended that employees carefully consider their financial situation and opt out of the deferment program if they are concerned about future tax burdens or benefit reductions.
Table Summary
| Benefit | Consequence |
|---|---|
| – Short-term financial relief | – Increased future tax burden (double the original rate) |
| – Possible reduction in future Social Security benefits | – Repayment penalty if not repaid by April 2021 |
Employer Responsibilities for Payroll Tax Deferment
The payroll tax deferment option allows employees to postpone the payment of certain federal income taxes between September 1, 2020, and December 31, 2020.
Employer Obligations
- Employers must withhold the deferred tax from the employee’s wages during the deferral period.
- The withheld tax must be deposited with the IRS by the regular due date.
- The deferred tax must be withheld from subsequent paychecks beginning January 1, 2021, through April 30, 2021.
Tax Payment Schedule
The following table outlines the tax payment schedule for deferred taxes:
| Paycheck Period | Withholding Amount |
|---|---|
| September 1, 2020 – December 31, 2020 | Deferred |
| January 1, 2021 – April 30, 2021 | Doubled (to repay deferred tax) |
Employers must ensure that the payroll system is updated to accurately calculate and withhold the deferred tax amount. They should also communicate the deferment option and its impact on employees’ paychecks clearly to their employees.
I hope this article has helped you understand payroll tax deferment and how it can potentially impact your financial situation. Remember, this is a temporary measure, and the deferred taxes will eventually need to be repaid. Before making any decisions, it’s important to weigh the potential benefits and drawbacks carefully. If you have any further questions, don’t hesitate to consult with a tax professional.
Well, that’s about all I have for you today! Thanks so much for reading. I hope you found this article helpful and informative. Be sure to check back for more updates on personal finance, taxes, and other related topics. Until next time, take care and keep saving!