A 2020 Payroll Tax Deferral Holiday Raise Followed by a Pay Cut in 2021

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With Trump’s executive order to suspend employee payroll taxes for 2020 and defer them to 2021, many eligible workers will enjoy a temporary boost to their paychecks in 2020. However assuming no other pay increases or tax rate changes, those same employees will see smaller paychecks early next year as participating employers have to withhold and pay the deferred amount back to the IRS.

The employee payroll tax break is equivalent to 6.2% of your paycheck (essentially the social security tax/FICA line on your pay slip) and is only available for those making less than $4,000 on a bi-weekly basis, or $104,000 per year and applies to wages paid starting September 1, 2020, through December 31, 2020. Anyone making more than this won’t be eligible for this temporary raise. Here is a table showing how this will pay out, assuming a constant pay for an employee during the eligible period.

Many employers are still not offering this deferal, even if your salary is less than 100k. The reason is due to the late guidance from the IRS on implementing this program which has meant payroll providers and departments haven’t had time to implement the withholding. Most should have it done by then and start deferring current and retroactive payroll tax payments. This was why the bump in your pay check may not yet be apparent.

Also see below on why some employers may not offer this deferral at all!

Per the table you can see for someone earning $1,000 bi-weekly (26 bi-weekly periods in a year) from September through December would get an additional $62 in their bi-weekly paycheck, which is equivalent to $558 in 2020 (over 9 bi-weekly periods). A full-time worker making $40 p/hour, would see $198 more per month, and $1,786 by the end of the year. Note this table is just illustrative and everyone’s pay check will vary based on deductions, withholding and other pay variations (e.g. overtime) so you will need to check with your employer for your specific increase related to this tax deferral.

Hourly WageBi-weekly Gross PayAnnual Equivalent2020 Bi-weekly Benefit2020 Total Saving (Q4)
$6.25$500$13,000$31$279
$7.50$600$15,600$37$335
$8.75$700$18,200$43$391
$10.00$800$20,800$50$446
$11.25$900$23,400$56$502
$12.50$1,000$26,000$62$558
$13.75$1,100$28,600$68$614
$15.00$1,200$31,200$74$670
$16.25$1,300$33,800$81$725
$17.50$1,400$36,400$87$781
$18.75$1,500$39,000$93$837
$20.00$1,600$41,600$99$893
$21.25$1,700$44,200$105$949
$22.50$1,800$46,800$112$1,004
$23.75$1,900$49,400$118$1,060
$25.00$2,000$52,000$124$1,116
$26.25$2,100$54,600$130$1,172
$27.50$2,200$57,200$136$1,228
$28.75$2,300$59,800$143$1,283
$30.00$2,400$62,400$149$1,339
$31.25$2,500$65,000$155$1,395
$32.50$2,600$67,600$161$1,451
$33.75$2,700$70,200$167$1,507
$35.00$2,800$72,800$174$1,562
$36.25$2,900$75,400$180$1,618
$37.50$3,000$78,000$186$1,674
$38.75$3,100$80,600$192$1,730
$40.00$3,200$83,200$198$1,786
$41.25$3,300$85,800$205$1,841
$42.50$3,400$88,400$211$1,897
$43.75$3,500$91,000$217$1,953
$45.00$3,600$93,600$223$2,009
$46.25$3,700$96,200$229$2,065
$47.50$3,800$98,800$236$2,120
$48.75$3,900$101,400$242$2,176
$50.00$4,000$104,000$248$2,232

The IRS issued guidance on implementing these changes and placed the responsibility on employers for collecting the 6.2% employee tax deferrals and making the payment to the IRS by April 30th, 2021 – unless Congress chooses to forgive this tax deferral. Also to note the determination of applicable wages to qualify for this deferment is made on a pay period-by-pay period basis. So if you have a variable income or change jobs which increases your salary, you may not qualify for this payment. Finally, this payroll tax deferral does not apply to the equivalent employer portion of payroll taxes (also 6.2%) or 2.9% payroll tax to support medicare

A smaller paycheck in 2021?

While the extra money will be nice coming into the holidays, just be mindful not to rush out and spend it as your 2021 paycheck will likely be smaller by the equivalent amount it went up in 2020 once employers start to withhold taxes from January 2021 to repay this deferred employee payroll tax liability to the IRS.

If you are worried about having a smaller pay check because of this in 2021, you should discuss options with your HR or Payroll department which may include an option to allow employees to continue to have the payroll tax amount deducted, as it would prior to September. This way your paycheck will stay the same and your employer will keep your payroll withholding in a company managed account that will be used to make the payment to IRS, without you seeing an impact to your 2021 paycheck for this item. Just be careful around your options or impact with this approach if you change employers between 2020 and 2021.

Does My Employer Have to Offer this?

One important factor around this program is that it is optional for employers – who are ultimately responsible for administering the program – so if they don’t choose to enable this deferral many Americans will likely never see a boost in their paycheck.

Several companies are hesitant to participate because they could ultimately be on the hook for the money when it’s due next year. And if they are already facing challenging conditions during the current pandemic they may not want this liability on their books.

“….practically all of the retailers that we’ve heard from on this issue have decided that they’re not going to implement the deferral, or their company hasn’t made a decision yet,”

Rachelle Bernstein, vice president of the National Retail Federation on FOX Business.

I also received a question on whether federal or state government employees would be subject to this payroll tax deferral. The answer is Yes; and it was clarified in the IRS ruling which states that the deferral shall be made available with respect to any employee the amount of whose wages or compensation, as applicable, payable during any bi-weekly pay period generally is less than $4,000. The enforcement of this deferral has been criticized by several groups who say this is just putting a band aid on the economic pain versus providing a more sustainable solution (e.g a second stimulus check) that does not deplete social security funds which is funded by payroll taxes.

While this tax break will only help workers with jobs, Trump’s other executive order around the Lost Wages Assistance (LWA) program does provide $300 in weekly benefits to eligible unemployed Americans.

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