What the memorandum on deferring payroll tax obligations means for you
On the 8th of August, 2020, the president of the United States of America signed a memorandum on deferring payroll tax obligations addressed to The Secretary of the treasury with an instruction to defer the payroll tax obligations due to the ongoing Convid-19 pandemic. This government benefit of deferral of taxes means a deferral of the employee’s portion of Social Security taxes for some people in an effort to offer more relief to workers due to the COVID-19 pandemic and its effect on the financial strength of the majority of employees.
The memorandum instructed that the deferral of the social taxes of workers should be from a period of September 1, 2020, to the 31st of December, 2020. Employers, therefore, have to suspend withholding and paying to the IRS the social security taxes of eligible employees. This government benefit of deferral of taxes however only applies to employees whose wages are less than $4,000 for a biweekly pay period, including salary earners making less than $104,000 per year.
It however has to be noted that the government benefit of deferral of taxes only gives an allowance for a deferral of tax but not for the forgiveness of the tax and also, it only applies to social security taxes and not to medicare taxes. The government benefit of deferral of taxes within this period of September to December 2020, means that come 2021, a need to pay up the deferred taxes will arise. This will lead to extra financial burdens on the workers in 2021 unless a memorandum for the forgiveness of differed taxes is also issued by the government.
However, since the government benefit of deferral of taxes did not include any penalties for non-compliance with the directive, it remains uncertain how many private-sector employers will suspend the collection of their employees’ Social Security taxes because the majority of them will consider the strenuous technical work needed to adjust the company’s payroll to accommodate the deferral directive.
Payback 2021
The government benefit of deferral of taxes is almost like a short term interest-free loan given to employees. Repayment will be required when the deferral of taxes period elapses unless the government issues another directive stating otherwise. This means that employees should expect a reduced net pay from January 2021 as equal to the increased net pay that will be experienced from September 2020 to December 2020. With the government benefit of deferral of taxes, no penalties or interest will be required from employees this year, however, refusal to pay back in 2021 will attract tax penalties.
What happens when employees leave after December 31st?
It is obvious the IRS will definitely demand repayment of the deferred taxes by 2021 and departing employees will still have to pay up their deferred taxes. Since most employers are responsible for the delivery of the employees’ Social Security taxes to the IRS, they might have to work out a possible re-payment arrangement with any departing employee. To prevent loss on the part of the employer, they might have to enforce a collection method for the taxes of departing employees.
Companies that realize how hard some employees find this pandemic period because of their reduced wages will see this government benefit of deferral of taxes as a great opportunity to financially provide relief to their workers even if it has to be repaid next year.
Additionally, employees have to understand that the Covid-19 relief directive is for a deferral and not a total cancelation of taxes, therefore it is temporary. Workers should take advantage of this period to save money and use the short-term increment wisely so as not to be overly stressed financially when it is time to pay the money back to the IRS. As beneficial as this government benefit of deferral of taxes is, it can become a burden if employees do not manage their finances properly during this period.
About us
We are a tax relief firm dedicated to giving you the best results regarding resolving your tax debts. Our team of qualified professionals is available round the clock to provide you with the assistance you need. Contact us now at 888-585-8629 or 617-430-4674 or send us an email at help@newstarttaxconsulting.com.
For more information, email info@newstarttaxconsulting.com
