Will The Payroll Tax Cut Executive Order Impact You? | Jay Santana
A new executive order was issued on August 8 in relation to the deferral of Payroll Tax for employees. Our tax team has reviewed it and written the following summary and some key points of the legislation below.
Overview of how the FICA (Payroll) Tax works:
The executive order deals with payroll levies known as FICA taxes that are paid to support Social Security and Medicare. Workers pay 6.2% of their wages to help finance Social Security, while employers pitch in another 6.2% on behalf of employees. These taxes are paid on the first $137,700 in wages (for 2020), with no taxes on income above that. Employees and employers also pay another 1.45% each to support Medicare.
What the new executive order does:
The new executive order delays withholding and payment on the 6.2% employee Social Security portion only.
This will apply only to employees who earn less than $4,000 every two weeks (Earning under $104,000 a year).
The deferral will start on Sept. 1, 2020 and go through Dec. 31, 2020.
Example: Assuming a worker earning $60,000 a year doesn't have that 6.2% withheld for four months, the temporary cash flow would be around $1,240, spread over four months.
What you should know:
Employers are supposed to stop withholding the payroll tax on Sept. 1, but for many it won't be that easy. Companies need guidance from the IRS on exactly who is eligible to have their taxes suspended and how to keep track so those taxes can eventually be repaid.
As such, some employers will be delayed in the withholding until October or November. And it is currently not mandatory for the employer to participate to date, thus some employers may not participate at all.
Additionally, a deferral of payroll taxes implies that at some point, you’ll need to pay those taxes that weren’t withheld.
Trump’s executive order specifies that the secretary of the Treasury will “explore avenues, including legislation, to eliminate the obligation to pay the taxes deferred” by the executive order. But it’s up to Congress to decide whether or not to permanently forgive the deferred payroll taxes.
Do you have questions about the new payroll tax deferral, or wonder whether it’s worth pursuing for your business? Reach out to our team HERE
