On August 8th President Trump announced a payroll tax deferral for employees who earn less than $4,000 per bi-weekly paycheck, or less than $100,000 per year. According to the President’s memo and IRS Notice 2020-65 providing implementation guidance, the payroll tax deferral program allows employers to stop withholding the employer piece of the social security tax, which is 6.2% of your taxable wages, through the end of the year.
This amounts to a temporary 6.2% pay raise, and who wouldn’t want a raise? It seems like a no brainer, but like most things involving your taxes, it’s not that simple. There are two important considerations to keep in mind:
1. Your employer might not let you participate.
Employers have to opt-in to the deferral program for you to take advantage of the temporary tax savings. If your employer decides not to participate, then you cannot receive the temporary pay increase
Forbes has a negative forecast pertaining to employers opting-in to the program. There are too many uncertainties and not enough time to deal with the administrative headaches associated with adopting the program, and many employers, especially large companies, have decided that they will not participate.
Also, per IRS Notice 2020-65, employers are ultimately responsible for paying back the deferred taxes (more on that below) so they may not want to risk allowing the tax deferral for an employee who might quit before the taxes are repaid.
If you work for such a company, then there is nothing that you can do as an individual to take advantage of the deferral program. If you do have an interest in this program, check with your employer’s payroll department and ask them if they plan to make the deferral available to employees.
2. Tax deferral is not tax forgiveness, and may be bad in the long run.
Assuming your employer does opt-in, you should consider whether the payroll tax deferral is a good idea for you. You might wonder how getting more in your paycheck could be a bad idea. But remember, as of right now this is a deferral of tax, not forgiveness, and it is likely that you will have to pay it all back starting in January of 2021.
President Trump’s memo instructs the Secretary of the Treasury to explore the possibility of forgiving the deferred payroll taxes, but the President cannot forgive the tax by executive order. Unless Congress passes a law that forgives the deferred payroll taxes, you will likely see a corresponding 6.2% decrease to your paycheck in the first four months of 2021 to repay the extra money you are getting now.
So, should you take the 6.2% deferral if you are eligible and your employer will permit you to do so? It depends. If you have the ability to squirrel away the tax savings while you wait and see if Congress will forgive the taxes later, then you could wind up with extra money that you don’t have to pay back. The largest employer participating in the deferral program is the federal government, so there will be some pressure on Congress to forgive the deferral, but it remains a big and risky unknown.
If, on the other hand, you are living paycheck to paycheck and cannot imagine how you could ever afford a 6.2% pay decrease, then I would not take the deferral, even if your employer will allow it. If that is your situation, the pay increase today invites tax trouble tomorrow. And you should know that the IRS will allow your employer to deduct the interest and penalties that the IRS will charge if you do not pay it all back by April 21, 2021. I would urge you not to take the risk because the deferral could prove to be expensive money later and put you behind on your other monthly bills that starts a downward financial spiral that is hard to reverse.
If the payroll tax deduction is an option where you work, please consider these issues carefully before making your decision. If you are facing IRS issues on the State or Federal level, we are here to help.
