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Much ado about the Payroll Tax break

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On August 8th the White House published an Executive Memorandum that ordered a deferral of social security payroll taxes for employees earning less than $104k per year from September 1 to December 31, 2020. But, employees may never actually see this tax break in their paychecks. The reasons why are:

  • The President does not have the authority to change the tax law, only Congress can do that. So, the only thing this memorandum does is DEFER the payroll tax.  So (as currently written) you will get an extra 6.2% in your paycheck from September to December but then you have to pay it ALL back starting in January.

 

  • Trying to administer this tax break would be an absolute nightmare for payroll companies and the IRS. Doing the calculations, properly crediting the deferred payments, and reporting this on the quarterly payroll reports (941) and the W2s would be untenable.
    • E.g 1. Let’s say you work for Employer A in 2020 and you have $1000 of payroll taxes deferred. Then on January 1, 2021 you have to pay it back so Employer A withholds the normal social security tax + the deferred amount. So, in January your net pay go down by 12.4% (the normal 6.2% social security tax that comes back into play on 1/1/21 plus the deferred amount from 2020 that you now have to pay back).
    • E.g 2. Let’s say you work for Employer A in 2020 and you have $1000 of payroll taxes deferred. Then on January 1 you Quit Job A and get hired at Job B.  How will Job B know that you need to pay back $1000?
    • E.g. 3. Or let’s say that the government decides the payback is handled on your 2020 income tax return instead of through payroll, does that mean your refund on your 2020 taxes goes down by $1000?  How does your tax preparer know that you had $1000 deferred? Will we add a box on your 2020 W2 that shows a payroll tax payable?
    • E.g. 4. Let’s say your normal salary is $99k so you are below the threshold all year so you have your payroll taxes deferred. Then your employer gives you a Christmas bonus of $6000 so all of a sudden you now make more than $104k per year. Are you no longer eligible for the deferral? Do you have to pay it all back on the bonus check?

So for now, I would suggest you do not count on this tax break and instead call your Congressperson and urge them to pass a comprehensive solution to the COVID financial crisis.

UPDATE 8/28/2020: The Treasury and the IRS released guidance today on the payroll tax deferral. The most critical part of it is that employers are fully liable for the payroll taxes. So, without an effective means of clawing this money back from employees if they leave the company this just puts another huge burden on employers.

 

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