In a bid to help workers during the corona virus pandemic, the president introduced a memo which directs the treasury department to allow employers to defer payroll taxes starting from September, 1, 2020 until the end of the year.
This measure mainly applies to employees who make less than $4,000 bi-weekly.
To this effect, a moratorium was instituted on the collection of payroll taxes. This move was made on August 8, 2020, when four executive actions were issued due to the breakdown of negotiations on-going with Congress leaders concerning the next wave stimulus program to cushion the Covid-19 pandemic impact.
It was, however, not an executive order according to widespread report but a Memorandum to the Secretary of the Treasury, which was titled “Deferring Payroll Tax Obligations in Light of the On-going Covid-19 Disaster” (“The Memo”). Employers have been analytical to the Federal government’s approach and somewhat confused about the necessary considerations required to be made when processing their employees’ pay checks.
As a financial advise, this is a good start, however this article will give you tax advise, keep reading:
But What Exactly Does The Memorandum Mean For You?
Titled “Deferring Payroll Tax Obligations in Light of the On-going COVID-19 Disaster”, the memo allows employers to outface the employee quota of Social Security payroll taxes for any employee.
The amount of whose wages or compensation, as applicable, payable during any bi-weekly pay period generally is less than $4,000, calculated on a pre-tax basis, or the equivalent amount concerning other pay periods.
The said ’employees’ refer to American workers who are most in need. It is expected that the action will, in the short- and long-run, give money directly to American workers and generate more incentives for work and employment during the last four months of the year when the money is needed most.
According to the White House, the memorandum’s implementation shall be deferred without any form of penalty, interest, or addition to the tax for the enlisted individuals in the months of September, up until December 2020.
As instructed by the White House, the Internal Revenue Service (IRS), on August 28, 2020, has issued Notice 2020-65, which provides additional guidance for employers on implementing the memo.
The IRS Notice 2020-65 clarifies that the total wage determination is made on a pay-period-by-pay-period basis, which may disqualify the same employee in specific pay periods based on overtime wages or other bonus pay.
The Tax Will Ultimately Be Collected
Furthermore, for an employer who pays wages based other than the conventional biweekly basis, the $4,000 threshold will be recalculated concerning the/different pay periods as an equivalent amount.
In other words, the payroll tax deferral is a brief suspension of the usual 6.2% tax contributed by employees toward Social Security.
However, while the measure will undoubtedly increase the take-home pay of employees until January, the tax payment would be moved, or ‘deferred’ as the memo says, clearly stating that the money would be paid back next year without increase or additional charges except if delayed until May 1, 2021.
According to the IRS Notice 2020-65, “interest, penalties, and additions to tax will begin to accrue on May 1, 2021, concerning any applicable unpaid taxes.”
In a scenario where an employee resigns or changes employment before the deferred tax payment date in January 2021, when the repayment of the taxes will begin, they will be individually responsible for making the taxes’ repayment, however, it is unclear exactly how the taxes will be collected.
This is so as the IRS’s said supplemental guidance on August 28, 2020, is brief and left most implementation questions from tax professionals and business owners unanswered.
One such question is how employers should collect deferred payroll taxes from employees who separate from organizations before the end of April 2021, when full recoupment for deferred payroll taxes is to be made.
Is There An Upside and How Will It Play Out
Despite the possibility that a signed executive order could enable outright forgiveness of the tax, which after that, will be left to legislation from Congress, there exists a certain tepidness and opposition from employers in the private sector and questions from the public sector.
Being the nation’s largest employer, the federal government has made it optional for private-sector employees and compulsory for the government employees, which have met various forms of displeasure, as they argue why the government would deny their rights to making a choice.
This position employees in a controversial position as a delay of the payment into the month of May will attract additional charges.
From the start, several employers and business groups have been skeptical of the initiative. In the company of over 27 other organizations, including the National Retail Federation, the conservative U.S. Chamber of Commerce has sent a letter to Congress stating its polarity to the tax deferment plan.
“Many of our members consider it unfair to employees to make a decision that would force a big tax bill on the next year.
It would also be unworkable to implement a system where employees make this decision,” the Chamber’s letter declared.
Several other employers (as listed by Forbes), ranging from large public companies to small businesses, from state governments to individual counties, from large public universities to small private colleges, have announced their decline of the invitation.
What to Do If You Can’t Opt Out Of The Payroll Tax Deferral
One of the strategies available to you as an employee is to determine how much extra is being received due to the payroll deferral and lay money aside as savings.
If you cannot afford the extra tax in 2021 out of normal earnings, you should be setting aside the extra funds received currently in a savings account to be drawn down on during the first four months of 2021 to avoid being in a position to need to fund normal life expenses with high-interest credit card debt or personal loans.