In early August, President Trump officially issued an executive order for a payroll tax deferral to begin September 1. In this letter, we want to fill in the blanks, answering: Just what is the new payroll tax deferral, and who does it help?
Let's
start by clarifying a few things:
- Payroll tax relief only applies to those
with a biweekly pre-tax paycheck of less than $4,000.
- The deferral only applies to those on a
payroll. The relief won't aid millions of those unemployed or furloughed
due to COVID-19.
- The relief only addresses the employee's
6.2% share of Social Security taxes, not the 1.45% Medicare taxes.
- The employee is expected to repay the
deferred payroll tax through ratable payroll withholding between January
1, 2021, and April 30, 2021.
On
August 8, 2020, the President issued four executive orders extending
unemployment bonuses and postponing payroll taxes.
Payroll
tax deferral is the order of interest to most of us. Basically, from September
1 - December 31, employees won't have to pay their 6.2% Social Security
earnings. Although in theory, this makes workers 6.2% better off, we will be
expected to pay this back into the government's coffers over the first four
months of 2021.
Who Qualifies for Payroll Tax Relief?
Payroll
tax deferral only aids those on a payroll. The President's deferral does not
apply to the self-employed. President Trump's payroll tax relief only applies
to people who earn a pre-tax income of less than $4,000 biweekly -
approximately $104,000 annually. The maximum deferral is $2,149 ($8,666 x 4
months x .062).
Relief, or a Short-Term Loan?
A
further thing to consider is the upcoming election. Should President Trump win
a second term, he has said his administration would work toward forgiveness of
the deferred payroll tax and ask Congress for appropriate legislation.
Please give us a call with any additional questions that you may have!