Trump issued a payroll tax deferral through an executive memorandum on August 8, 2020. When Congress did not include a payroll tax cut in a potential stimulus deal, Trump used executive action. The payroll tax deferral is to start September 1, 2020 through December 31, 2020. Here’s what you need to know, and what it means to employees paychecks and business accounting.

How the Payroll Tax Deferral Works

  • This a is tax deferral which will allow a payroll tax cut lasting from September 1, 2020 thru December 31, 2020.

  • Qualifying employees will not have to pay the 6.2% payroll tax for Social Security.

  • Employees who qualify for the payroll tax deferral are individual employees who earn less than $4,000 before taxes in a bi-weekly pay period. For salaried employees this would equal $104,000.

  • Employees will not be financially responsible for any penalties or late fees assessed on the amount of the payroll tax that is deferred.

  • While the payroll tax holiday is temporary, Trump directed U.S. Treasury Secretary Steven Mnuchin to explore ways, including through legislation, to forgive the payroll taxes permanently.

  • Employers will be responsible to pay the deferred payroll tax between January 1, 2021 and April 30, 2021. Why? The payroll tax ‘cut’ is effectively a deferral, which is paid back during the first four months of 2021.

What the Payroll Tax Deferral Means for Employees

  • Higher Paycheck Now
    For those employees who qualify, payroll taxes may or may not be deducted from their paycheck. This will allow for a bigger paycheck from September 1 thru December 31, 2020.

  • Lower Paycheck Later
    However, your paycheck will be lower from January 1, 2021 through April 30, 2021.

  • Starting January 1, 2021 employers will begin deducting normal payroll taxes plus they will also withhold the payroll tax that was deferred from September 1 thru December 31, 2020 for the payroll tax holiday.

Frequently Asked Questions

Yes. The payroll tax holiday is temporary tax deferral from September 1, 2020 until December 31, 2020.

The payroll tax holiday is a deferral–so it is temporary. This was to provide to some temporary financial relief during the COVID-19 crisis. The best way to think of this is an interest free loan from the government. Employers will not withhold taxes from qualifying employees paychecks from September 1, 2020, until December 31, 2020. Starting January 1, 2021, employers will resume normal payroll tax withholding, but they will also be withholding the deferred taxes from the tax holiday during the first four months of 2021.

However, Congress is working on legislation to possibly allow forgiveness on the tax deferral. But with no legislation currently in place, the deferred taxes must be paid back in 2021.

The last four months of 2020 income will be higher due to the deferral of the payroll taxes. However, the first four months of 2021, paychecks will be lower due to the repayment of the deferred taxes from 2020. If Congress passes tax forgiveness, this will not be the case.

Employers are not obligated to participate in the payroll tax holiday. It is completely optional. There are no penalties for not participating. However, employers must repay the taxes before April 30, 2021 to avoid any late fees and penalties.

All employers (including government entities) may defer the deposit and payment of the employer’s share of Social Security tax.

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