Payroll taxes might be the last thing you want to think about on Labor Day, but now is the time to understand how the new payroll tax break works.
This payroll tax deferral opportunity, recently established by President Donald Trump, is available only from September through December. So, there is limited time for employers to take advantage of it — not that they necessarily should.
For workers, the deferral is akin to postponing a debt. For retirees, the deferral will not reduce tax revenue for the already-worrisome level of Social Security reserves, but it could affect those reserves in another way.
How does the payroll tax deferral work?
Confusion has surrounded Trump’s executive memorandum about the payroll tax deferral since he issued it on Aug. 8. But new guidance from the IRS and clarification from Republicans on the House Ways and Means Committee provide further details of how it works.
Basically, the executive memorandum allows — but does not require — employers to postpone the employee portion of the Social Security taxes that they normally must withhold from employees’ paychecks.
These taxes are 6.2% of an employee’s pay. So, if an employer opts to defer them, eligible employees will have bigger paychecks from September through December because 6.2% of their pay would not be withheld from their checks during those months.
The catch is that employers must withhold the deferred taxes from eligible employees’ checks within the first four months of 2021.
This means that the employees who see bigger paychecks than usual from September through December will see smaller paychecks than usual from January through April.
In effect, employers who opt to participate in the deferral are merely postponing a governmental debt on behalf of their eligible employees.
Who is eligible for the payroll tax deferral?
Employees who make less than $4,000 biweekly — or less than $104,000 annually — are eligible for the deferral.
Being eligible does not guarantee you a deferral, however: It’s up to your employer. As the House Ways and Means Committee writes in a blog post, the executive memorandum “does not provide a right for employees to demand that an employer participate in the deferral.”
Self-employed people are not eligible for the deferral at this time.
“Additional guidance would be required in order to apply the deferral to self-employment taxes,” the committee explains.
Will the payroll tax deferral affect Social Security trust funds?
Technically, the payroll tax deferral will have no net effect on Social Security funding because it merely postpones Social Security payroll taxes. It does not eliminate any Social Security payroll taxes, so it will not shortchange the Social Security coffers of any such taxes.
In fact, the IRS guidance states penalties and interest will apply to deferred Social Security payroll taxes that are not paid by May 1, 2021.
There is one way in which Social Security trust funds might be negatively affected by the payroll tax deferral, however.
Social Security reserves generate interest, which is its own source of revenue for the Social Security coffers. So, any Social Security payroll taxes that are not paid as usual in September through December will not have the opportunity to generate interest during that time.