BREAKING NEWS

Payroll Tax Cut Starts Today!

Real News Real PatriotsSeptember 3, 20207min
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Trump’s payroll tax cut, which he issued through an executive memorandum, has important implications for your paycheck. Suspension of payroll taxes is one of Trump’s top priorities. When Congress did not include a payroll tax cut in a potential stimulus deal, Trump used executive action on August 8 to introduce a payroll tax holiday.

How the payroll tax cut works

Here’s how the payroll tax cut works:

This is a temporary payroll tax cut that will last from September 1, 2020 until December 31, 2020.

During this period, certain employees will not have to pay a payroll tax, which is 6.2% for Social Security.

The payroll tax cut applies to individual employees who earn less than $4,000, before taxes, during any bi-weekly paycheck period. This equates to $104,000 per year for a salaried employee.

Employees will not be financially responsible for any penalties or late fees assessed on the amount of the payroll tax that is deferred.

While the payroll tax holiday is temporary, Trump directed U.S. Treasury Secretary Steven Mnuchin to explore ways, including through legislation, to forgive the payroll taxes permanently.

Employers will be responsible to pay the deferred payroll tax between January 1, 2021 and April 30, 2021. Why? The payroll tax ‘cut’ is effectively a deferral, which is paid back during the first four months of 2021.

What the payroll tax cut means for your paycheck

Here’s what the payroll tax cut means for your paycheck:

Higher Paycheck Now: If you qualify for the payroll tax cut, your paycheck may be higher for the remainder of this calendar year. This is because payroll tax may not be deducted from your paycheck.

Lower Paycheck Later: However, your paycheck will be lower from January 1, 2021 through April 30, 2021.

Your paycheck will be lower during the first four months of 2021 because employers will deduct the payroll tax in the normal course beginning January 1, 2021. Employers also will withhold the payroll tax from September through December 2020 that was deferred through the payroll tax holiday.

Payroll Tax Q&A

The IRS has released some guidance on the payroll tax holiday. However, there is still confusion regarding the payroll tax holiday, which has left many questions unanswered.

Is this payroll tax holiday permanent?

No, this is a temporary payroll tax holiday.

Will there be payroll tax forgiveness?

The payroll tax holiday is a deferral, meaning it is temporary financial relief. Think of it as an interest-free loan — and the amount of payroll tax that is deferred must be paid back. This means that the payroll tax will not be “withheld” from your paycheck for the remainder of this calendar year, which may result in a higher paycheck for you. In the first four months of 2021, your employer will withhold regular payroll taxes and withhold the payroll tax you would have paid from September 1, 2020 through December 31, 2020. That said, Congress could pass legislation to forgive the payroll tax permanently. Absent legislation, however, the payroll tax that was not withheld in 2020 must be paid back in 2021.

How will this payroll tax cut affect my cash flow?

From January 1, 2021 through April 30, 2021, your paycheck will be meaningfully lower. Why? Effectively, you could be paying double payroll tax. This is because your employer is deducting your normal payroll taxes plus the payroll tax that was deferred on your paycheck for the final four months of 2020. This could materially impact your cash flow, particularly if you live paycheck to paycheck. Since your paycheck would be higher from September 1, 2020 to December 31, 2020, you may want to save your incremental cash over the next four months and use it during the first four months of 2021 to cover any cash shortfall. You can also use the incremental income to start, or add to, an emergency fund.

Who does not benefit from this payroll tax cut?

There are several individuals who may not benefit from this payroll tax cut. Payroll tax holidays exclude those who are unemployed or retired. If you are self-employed and don’t pay payroll taxes, you also may be unaffected. If you earn more than $4,000 during a biweekly pay period or more than $104,000 annually, you would not be impacted by this payroll tax holiday.

What does the payroll tax holiday mean for seasonal workers?

If you are a seasonal worker or you leave your employer on or before December 31, 2020, you may benefit from the temporary payroll tax holiday. However, it’s unclear how you would “repay” the payroll tax benefit if you no longer receive a paycheck from your employer. To avoid any future headaches, you should consult with your employer in advance so that you fully understand the financial implications of any payroll tax holiday on your paycheck.

Will every employer participate in the payroll tax holiday?

The payroll tax holiday is not mandatory, so it’s possible that your employer may not participate. There does not appear to be any penalties for non-participation, although this could change. If an employer does not pay the deferred payroll tax by April 30, 2021, an employer could be liable for penalties and late fees.

Author : Zack Friedman

Source : Forbes : Payroll Tax Cut Starts Today

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