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Your Federal Payroll Tax Deferral Questions Answered

Tax Planning Taxes

Sept. 1, 2020 marked the first day of the Federal payroll tax deferral, which is a temporary suspension of the 6.2% Social Security tax most traditional employees pay out of each paycheck. We answer your burning questions below.

Woman reviews her paycheck stub.

1. What is the payroll tax deferral?

On August 8, President Trump issued a memorandum to the IRS that allows employers to suspend withholding eligible employees’ Social Security payroll taxes and paying them to the IRS. ​On August 28, the IRS issued Notice 2020-65, making the deferral official. The decision was intended to be yet another element of COVID-19 relief. But it is a voluntary option, meaning employers are not required to suspend withholding. There are no penalties for noncompliance.

The suspension period runs from Sept. 1, 2020 through Dec. 31, 2020.

2. Is every employee eligible for the payroll tax deferral?

Unfortunately, no. Not every employee is eligible. The suspension only applies to you if you earn less than $4,000 for a biweekly pay period. That includes salaried employees earning less than $104,000 per year.

It’s also important to note that any money removed from your wages to pay for health care under a cafeteria plan reduces the amount of applicable wages for payroll tax deferral eligibility. That includes any payroll deductions into a health savings account or flexible spending account. That exclusion potentially allows an employee who is just over the eligibility limit to qualify for the payroll tax deferral.

3. Is the decision to participate mine or my employer’s?

At the time the IRS issued its notice of the suspension, employees did not have the option to opt out of having their Social Security taxes withheld. And that remains the case. That means if your employer decides to comply with the program, you are at the mercy of that decision.

If you’re wondering what choice your employer has made – ask them. Many companies are proactively communicating their decision to employees, but if that’s not the case for you, there’s no harm in asking the question yourself so you know what to expect.

One employer has announced they will participate – the federal government. And that includes the military. Many lawmakers are pushing Treasury Secretary Mnuchin to allow those federal employees the ability to opt out if they’d prefer to continue having their payroll tax withheld. But that choice has yet to be granted.

4. Do I have to pay the money back eventually?

Technically, yes. All deferred taxes must be repaid to the IRS during the first four months of 2021. That is unless legislation is put in place between now and then that forgives the uncollected taxes.

To repay the money back, your employer will need to collect extra taxes from your paycheck starting Jan. 1 through April 30 of 2021. As a result, you’ll notice a reduced net pay in 2021 equal to any increase in net pay you received in 2020. Any tax amount not repaid by April 30, 2021 will begin to accrue penalties, interest, and “additions to tax”.

5. What if I quit my job before the start of 2021? Do I have to pay the withheld money back?

If you happen to quit working for the employer that deferred your payroll tax, the repayment situation gets a bit tricky. Notice 2020-65 is very vague in the guidance it offers for this type of situation. In fact, there is next to no direction. What we do know is that your employer remains liable for your share of Social Security taxes, but the due date for repayment is extended to 2022.

That said, the notice does grant your employer the right to make arrangements with you to collect the remaining amount owed. For instance, they could deduct it from your final paycheck. But the notice is not clear on just how far your employer can go to get that money from you. If your employer opted to not collect the money, however, they would be on the hook for paying the full amount back.

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