FAQ: Trump’s Payroll Tax Deferral in Action | Taxes
Starting in September, some workers may see their paychecks looking a little fatter, thanks to President Donald Trump’s payroll tax deferral that postpones the withholding of Social Security taxes until January 2021.
But it’s important to note two things about this four-month 6.2% salary boost.
First, while some call it a payroll tax cut, it is technically a deferral and, as it stands, those taxes will need to be repaid starting in January.
Second, many workplaces are deciding not to offer this payroll tax holiday due to administrative hurdles or the challenges created by the requirement to repay the money. “What we’ve heard is that many employers are opting not to do this,” says Amber Clayton, director of the Knowledge Center at the Society for Human Resource Management. Alternatively, some employers may choose to offer the tax break but allow individuals to opt out.
Confused yet? Here’s what to know about the reality of Trump’s payroll tax deferral.
What Is Trump’s Payroll Tax Deferral?
Initiated by an executive memorandum in August, the payroll tax deferral is a four-month 6.2% pay hike for eligible workers, based on the deferral of Social Security taxes until after Dec. 31, 2020.
The tax holiday, which was further formalized in recent IRS guidance, is designed to combat the economic hurdles caused by the coronavirus pandemic.
It includes a directive to suspend the withholding of Social Security taxes for American workers earning less than $4,000 on a pretax biweekly basis, or about $104,000 annually.
But here’s an important point to note: Those Social Security taxes will need to be repaid between Jan. 1, 2021, and April 30, 2021, if no permanent cut is enacted.
For many employers and employees, the specter of repayment is a major downside. Critics ask: What’s the point of giving American workers a four-month interest-free loan … from themselves?
How Much Will the Social Security Tax Deferral Increase My Paycheck?
Eligible workers may receive a temporary 6.2% pay increase through the end of 2020.
That percentage is based on how Social Security withholding works. American companies withhold 6.2% of wages under $137,700 in Social Security taxes. Employers match that amount, making for a total of 12.4% in Social Security taxes paid. When the employees’ portion of Social Security taxes are suspended, it creates a 6.2% pay bump for eligible workers.
Since this is a deferral, not a payroll tax cut, note that your first four paychecks of 2021 will likely have double Social Security withholding of 12.4% to recoup the total benefit.
Can I Opt Out of the Payroll Tax Holiday?
If their company implements the tax deferral, some employees may have the option to opt out. But it’s not a guarantee.
“An employer is not mandated to participate,” says Mike Trabold, director of compliance risk at Paychex, a company that provides payroll, human resources and benefits management. “But if they choose to, the guidance is silent on whether an employer needs to give individual employees the option to opt in or opt out.”
Here are some steps to take if you’d like to opt out of the payroll tax deferral:
- First determine whether your employer is offering the tax deferral. If your boss isn’t, you won’t have your Social Security taxes deferred by default. You will continue paying them like normal.
- If your employer is deferring Social Security taxes, per Trump’s executive memorandum, note that there’s no requirement that individual employees have the ability to opt out. For example, eligible members of the military and civilian employees will have their Social Security taxes automatically deferred without the option to continue paying them.
- If you don’t want to have your payroll tax deferred because, say, you’re worried about having to repay that amount in early 2021, it’s worth asking your human resources office whether you can decline to participate.
Bottom line: If you have questions, reach out to your human resource department.
What Wages Count for Trump’s Payroll Tax Deferral?
Wages of less than $4,000 on a pretax biweekly basis are eligible for the payroll tax deferral, with each paycheck evaluated individually. “The determination of Applicable Wages is made on a pay period-by-pay period basis,” according to the IRS.
That means workers with variable pay could qualify for the payroll tax deferral during a period in which they earn less than $4,000 and not qualify for it during a period in which they earn more than $4,000.
Compensation that is excluded from payroll taxes, such as deductions to a health savings account, don’t count.
What About Year-End Bonuses?
If you earn a year-end bonus, and it’s rolled into the same payroll entry as your usual paycheck, placing you over $4,000, you might not be eligible for the deferral that pay period. If it is counted separately, then you could be eligible to have Social Security taxes deferred.
Again, this is only if you’re working for a company that is offering the payroll tax deferral to staffers.
How Will Your Company Alert You About Whether You Can Participate in the Social Security Tax Deferral?
Different companies will communicate participation in varied ways. Some may send out a question-and-answer sheet while others may post some kind of notice on an internal website.
The Society of Human Resource Management provides some sample notices on its website. In one, the employer may specify, for example, the decision not to implement the withholding of Social Security taxes is because of the challenges of setting up a new payroll system or employee concerns about the reduction in take-home pay that would result from January to April of 2021.
If you’re hearing crickets from the corner office, your boss may still be in the process of rolling this out. “It’s not a small thing to modify payroll systems,” says Pete Isberg, vice president of government affairs at ADP, a payroll and human capital management company. For clarification, reach out and ask.
What If I Leave My Job While Receiving the Payroll Tax Deferral?
Employees who leave their jobs between Sept. 1 and Dec. 31 while receiving the payroll tax deferral may have to repay the amount deferred immediately.
“If somebody does plan to change employers, it may not be a good idea to do the deferral if you’re given an option,” Isberg says.
Depending on your employer and your state, your boss may take the deferred amount out of your final check. That could be a significant chunk of your last payment, Isberg says.
If you’ve had, say, eight pay periods during which you’ve deferred your 6.2% Social Security tax, your final paycheck could be decreased by about half.
If your employer can’t recoup the money from you, it will be on the hook to repay Uncle Sam. That risk exposure is one reason some employers have been hesitant to roll out this program, experts say.