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Payroll Tax Deferral

On August 8th, 2020, the president signed four executive orders have a direct impact on unemployment insurance benefits, evictions, student loans, and payroll taxes.

Here’s a Brief Summary

  1. Lost Wages Assistance (LWA) Program- The executive order provides federally funded supplemental unemployment benefits of $300 a week and requires the state to cover an additional supplemental payment of $100. The program end date is no later than December 27, 2020, and finds were cleared for the first three weeks of August. However, it is unclear if additional weeks of assistance will be provided or how long funds will be available. You may be eligible for LWA benefits if (1) your weekly unemployment benefit is $100 or more and (2) you are unemployed or working fewer hours due to disruptions caused by COVID-19. At this time only seven states have implemented this order, including Arizona, Louisiana, Massachusetts, Missouri, Montana, Tennessee, and Texas. They are currently distributing payments. All other states are in the application process. Only one state has declined, South Dakota.
  2. Evictions Moratorium -The CARES Act prohibited eviction moratorium, for renters receiving federal housing assistance or federally financed properties, that expired on July 24th. The executive order doesn’t extend the moratorium or provide additional funding. It only orders a review of existing resources to prevent evictions and foreclosures.
  3. Student Loans -The executive order extends the deferment on student loan repayment until December 31, 2020. This applies to student loans held by the U.S. Department of Education.
  4. Payroll Tax Deferral – The executive order includes a “payroll tax holiday” for the last four months of 2020. It only applies to the employee’s share of social security taxes.

How will the payroll tax deferral impact you?

The executive order for payroll tax deferral went into effect on Tuesday, September 1, 2020. It allows for the suspension of a portion of payroll tax withholding that would result in an increased paycheck for employees that make less than $104,000 a year. The suspended payments will not be forgiven or waived, only deferred. It would only provide temporary relief as it must be paid back in the first quarter of 2021.

Payroll taxes include FICA taxes that are deducted from employee’s paychecks. FICA tax consists of both a 12.4% Social Security tax and 2.9% Medicare tax. Both the employer and the employee contribute an equal amount to the payment of these taxes. This payroll tax deferral would only apply to the employee portion of the Social Security tax, which is 6.2%.

Guidance on Payroll Tax Deferral

On August 28th the Treasury Department and the Internal Revenue Service released guidance that implements presidential memorandum to defer payroll taxes. Here’s what you need to know:

  • Tax deferral is optional, implementation is not required by the employer
  • Deferral only applies to the employee’s share of social security tax. (Employers can elect to defer their portion of payroll taxes under a CARES Act provision)
  • Deferral only applies to wages that are less than $4,000 biweekly ($104,000 per year). It is not available to any employee that earns $4,000 or more bi-weekly.
  • The deferral only applies to wages in the period beginning September 1, 2002, and ending December 31, 2020.
  • The employer is responsible for collecting and paying the tax back. Employers must withhold and pay deferred tax between Jan 1, 2021, to April 30, 2021. Alternative arrangements are allowed.
  • Unpaid deferred tax will begin to accrue interest and penalties on May 1, 2020.
  • The payroll tax deferral isn’t available to self-employed individuals.

As noted above the deferral applies to a biweekly wage of less than $4,000 (or weekly wage Of $2,000) which means that the maximum deferral comes out to $124 for each week from now to the end of the year. This adds up to $2,232 in the 18 week deferral period. This amount will have to be repaid at the beginning of 2021, which means smaller paychecks at the start of the new year. The employer could take out double your regular Social Security contribution. For example, if social security withholding is normally $248 from your biweekly wage of $4,000. Then your employer may need to increase your contribution to $496 to pay deferred taxes owed.

The newly issues guidance leaves some question unanswered, such as:

  • Can the employee opt-out if the employer decides to implement the payroll tax deferral?
  • What arrangements can be made to collect and pay the deferred payroll taxes? What arrangements can be made to collect and pay the deferred payroll taxes for employees that are not on the payroll for 2021?
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