The United States, and indeed the entire world, was rocked by the COVID-19 outbreak. In response, the U.S. Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act and it was signed into law by President Donald Trump on March 27, 2020.
It included one-time cash payments to individuals, increased unemployment benefits, forgivable loans for small businesses, loans for corporations, and funding for state and local governments. Additional relief was provided in the Consolidated Appropriations Act 2021, signed into law December 27, 2020, which added further economic relief and extended some of the CARES Act provisions.
Payroll tax deferral was an element of the CARES Act.
What Does the Payroll Tax Deferral Mean for Employees’ Taxes?
Employees pay half of a 12.4% tax on their wages which covers Social Security, plus 2.9% to pay for Medicare. The payroll tax deferral means that the employee’s share of this tax withholding is deferred (not canceled or forgiven, just deferred) into 2021. Additionally, employers may defer their share of these tax holdings into 2021.
The payroll tax deferral period was March 27, 2020, through December 31, 2020, with repayment of the deferral originally scheduled to take place in January through April 2021. However, on January 20, 2021, the IRS modified the deferral payment period, extending it through Dec. 31, 2021.
The Key Things to Know About Payroll Tax Deferral:
- An employer may decide to not participate in the deferral due to concerns about program administration complexity, the difficulty of explaining to employees how the deferral will be handled, or other concerns.
- The deferral is only a delay. While employees could see a 6.2% increase in pay during 2020, they would also see a corresponding decrease in 2021 as the deferral is collected on top of the normal payroll tax deductions.
- Deferred taxes will be withheld by participating employers in even amounts during 2021. The complexity involves what happens to seasonal workers and employees who leave a company prior to the deferral being repaid. Companies are asked to “make arrangements” to collect the taxes, but that may prove to be difficult.
- The deferral applies only if an employee earns under $4,000 in a bi-weekly period. If a sizeable bonus pushes the pay amount over the $4,000 threshold, there is no deferral available.
What Are the Employer Impacts of the Payroll Tax Deferral?
- All employers are authorized to participate in this program.
- Form 941 was revised to include payroll tax deferral payments.
- Employers that file annual employment tax returns may defer payment of the employer’s share of Social Security taxes imposed on wages during this period.
- Employers who have already deposited all or any portion of an employer’s share of the Social Security tax may not defer payment on the amount already deposited.
- All amounts due from employers must be deposited by December 31, 2022.
- The IRS intends to send reminder notices to employers prior to each applicable tax due date.
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