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6 things to know about a payroll tax deferral

Current as of: 9/15/2020

1. What is the employee payroll tax deferral program?

A Presidential Memorandum issued on August 8 authorized employers to suspend withholding of the 6.2% Social Security tax from paychecks of workers who earn less than $4,000 per bi-weekly period, from September 1 through December 31, 2020.

This would increase the worker’s take-home pay by the amount of the tax – for example, a worker with earnings of $2,000 subject to Social Security tax would get $124 more. Keep in mind that the payroll tax is not forgiven, it’s just postponed and has to be repaid. Under IRS guidance, employers must withhold the postponed taxes over the first four months of 2021, meaning that workers who saw increased take-home pay would then get smaller paychecks in those months as their withholdings for Social Security tax are doubled-up until the entire amount is taken back.

You can think about the increase in take-home pay from September through December 2020 as a short-term loan that you’ll have to repay over the first four months of the new year.


2. Will the government forgive the unpaid Social Security taxes?

The Presidential Memorandum directs the Secretary of the Treasury to explore ways to possibly eliminate the obligation for workers to repay the taxes that were deferred. Until further guidance is provided, it makes sense to assume that current law will apply, meaning that higher take-home pay now from deferred Social Security taxes means smaller paychecks in the first four months of 2021.


3. Who is eligible?

Employers have the choice to enact the payroll tax deferral program for their staff. If employers decide to participate, the program will only apply to workers whose biweekly pay is below $4,000 on a pretax basis, which works out to an annual salary of $104,000.


4. If an employer participates in the program, can employees opt out?

Whether or not employees can opt out is ultimately up to their employer. A notable exception is the Federal government, where members of the military and many other Federal government workers will have their withholding automatically suspended for the remainder of 2020 and don’t have the choice of opting out.

If your employer does participate in the payroll tax deferral program and you would like to opt out, contact your human resources department to find out if you have the option to decline to participate.


5. What happens if you leave your job before all of the deferred Social Security taxes have been collected through increased withholding?

The IRS guidance directs employers to make arrangements to collect the unpaid taxes from workers but doesn’t provide specifics.  Among the possibilities is collection of the entire unpaid amount from a worker’s final paycheck, drawing away cash when lean times may lie ahead. 


6. If your employer participates in the program and you’re concerned about lower take-home pay during the first four months of 2021, what steps can you take?

Keep in mind that unless the government decides to forgive the postponed taxes, the increased take-home pay you enjoy for the remainder of 2020 is just like a loan that you’ll have to repay over the first four months of 2021, or perhaps sooner if you lose your job.

If you can manage without the additional money, it might make sense to set the temporary increase in take-home pay aside in a savings account so that you can bolster your reduced paychecks during the repayment period in 2021.

To help you stay on track, build the repayment money into a budget that maps out your expected income, fixed expenses (like rent or mortgage and car payments), retirement savings, and what’s available for everything else. If you don’t already have a budget, the AICPA Financial Literacy program has videos to help you start one of your own, and a home budget analysis calculator to help you determine where your money is going and identify areas for improvement.