Updated: Feb 2
***When this article was initially published the calculated savings included Medicare tax too. That has since been edited to reflect on the social security portion of payroll taxes which is what will be deferred***
President Trump's August 8th memorandum has received a lot of spotlight in the press and taxpayer's have expressed their strong feelings of like or dislike about his decision. A common theme that I have seen in almost all of the comments is that no one actually understands what it means. So I'll break down a few of the basics for you.
What is it?
President Trump directed the Secretary of the Treasury to defer the withholding, deposit, and payment of certain payroll tax obligations. The Secretary has determined that employers that are required to withhold and pay the employee share of social security tax are affected by the COVID-19 emergency for purposes of the relief.
It is important to note that this is a deferral not a release of the payroll tax obligation. This means that it must be paid at some point. According to the memorandum the withholding and depositing of these taxes would be held off until next year and be paid from January 1 - April 30, 2021.
The President has said that this will offer a form of relief for both individual taxpayers and businesses by giving them a small "boost" in their income. When looking at the numbers the stated intent is going to be quite a stretch to make happen. There should be a very big emphasis on the word small.
Employees and Employers both contribute 7.65% (15.3% combined) of wages to our social security and medicare system. It is the Employer's responsibility to withhold both portions and pay them on a schedule determined by the IRS. Payroll taxes are a part of business and a part of earning income in the United States. The amount of the deferral will be 6.2%, the amount that social security makes up of the payroll tax.
The actual amount of savings would be $6.20 for every $100 earned. So an employee earning $1,000/ week would see an increase of $62 each week. Keep in mind that this is only temporary and being deferred to next year, which means that it would have to be paid back. Not every employee is eligible for this though so let's first take a look at who is affected.
Who is Affected?
W-2 employees that make less than $4,000 bi-weekly are eligible for this deferral. The employers of these employees are as well. If you fit into this category please note this is a DEFERRAL. You will have to pay this money back next year along with your payroll taxes for January 1, 2021 to April 30, 2021.
So if you start getting "extra" money on your paycheck this month just keep in mind this really is not your money. Let's say that you make $1,000/week, that means for the remainder of the year you'll see an extra $62 each. Here is the kicker...next year when you have to adjust to not seeing that anymore you'll also be paying that $62 back at $124/ week. Slightly higher than the rate you received it. So you go from not paying that $62/ week to paying $124/ week. Where exactly is the relief? Many Americans have enough trouble trying to rebound from Holiday spending in January without having to worry about paying additional payroll taxes.
If an employer can't afford to pay their payroll taxes now how will they afford to pay slightly double in the Spring? How will the employee's manage their budgets if they don't understand how much will come out of their check in the Spring? Will this really provide any relief for taxpayers?
The answer is N-O!
Not only are we setting businesses and individual taxpayer's up for a bigger payroll tax bill than they're accustomed to in the Spring we're not funding Social Security and Medicare for months. Even longer if businesses can't pay the taxes in the Spring. Payroll taxes are the main source of revenue for these funds.
It has been argued that this will not drain the Social Security and Medicare fund because the deferral plan has been paired with a plan to repay it all. So those that depend on Social Security and Medicare will be left to suffer if businesses still can't back the funds in the Spring. Our Social Security system is a straw house just waiting to be blown down as it is. It can't stand to take the hit of not being funded for 4 months and then "maybe" being paid back.
What If My Business Can't Pay?
Businesses without proper guidance will have a false sense of hope until it's time to repay the deferred taxes which may be the final nail in the coffin for some businesses. If your business is on the brink of closing and can't pay the payroll taxes you can book an appointment with my team at https://bookingbowens.as.me/taxrelief . We'd be happy to have a no judgement call with you to help you settle that debt with the IRS.
If the tax is not paid by April 30, 2021 interest, penalties, and addition to tax will begin to accrue on May 1, 2021. Another thing for businesses to keep in mind is if an employee leaves between now and the time that the tax is due, they are still on the hook to pay that tax which will just add to the blow that comes in the Spring.
There will be options to set up payment arrangements with the IRS but with interest.
Can I Opt-Out?
Yes, you can opt out and not participate in the deferral. The decision makers in this situation are the business. Each business will handle this differently. If you're an employee I would reach out to your HR and/or Payroll department to see how your company plans on handling the memorandum. It is up to them whether or not they continue to withhold and make deposits.
The main thing to remember is that if you do see extra money on your check this month to not get used to it. It will only be that way for the remainder of the year. The same for business owners, don't get to used to that extra money because Uncle Sam will be back in January to reclaim his piece of the pie.
Timalyn S. Bowens EA is an Enrolled Agent, licensed through the Internal Revenue Service that works with businesses to increase profitability through strategic tax planning and the implementing of tax strategies through their budget. She is also the owner of Bowens Tax & Bookkeeping Solutions, a virtual accounting firm based out of Louisville, Ky.