2020 Payroll Tax Deferral – What Employers Need to Know
September 17, 2020
In August, the President issued an executive order for a payroll tax deferral through the end of 2020. This order allows businesses to elect to defer employee payments into Social Security for a limited period in hopes of temporarily keeping more money in the pockets of employees. The goal is to further stimulate a fluctuating economy. From September to December 2020, employers can defer withholding the 6.2% Social Security tax from their employees’ paychecks if the employee(s) makes $104,000 (pretax) or less annually (or less than $4,000 biweekly).
The idea of ending the year with more money in employees’ pockets sounds enticing, but it is important to understand that this deferral is just that – a deferral. The tax deferral is scheduled to end on December 31, 2020. Starting January 1, 2021, employees who chose to defer will have their regular 6.2 % Social Security tax deducted from their paychecks along with the Social Security taxes they deferred in 2020. All deferred taxes are to be paid back in full by May 2021. This means after several months of larger take-home pay, employees will experience four months of reduced take-home pay starting in January 2021 when both the back (2020) 6.2% Social Security taxes and current (2021) 6.2% Social Security taxes are withheld from their paychecks. Other things businesses may want to consider are the administrative costs and burden when implementing changes to payroll.
The President has indicated he would like to eventually forgive the deferred Social Security taxes to help further stimulate the economy, but this would have to be passed by Congress. Deferral is an option that employers should carefully consider before choosing to implement. Many employers have determined that participating in the optional deferral program is not in the best interest of their employees.
If you have any questions or would like further information regarding this payroll tax deferral program, please contact one of Hoffman Clark’s trusted advisors.