Payroll Tax Cut: Clarifying the Deferral

August 9, 2020

The recently announced payroll tax cut begs for more explanation. Here are the details so you will know what to expect from the deferral.

Image of a red background with white scissors cutting white paper, indicating the payroll tax cut.

The COVID-19 pandemic has undoubtedly left millions of Americans struggling to find financial security.  Recognizing the hardship so many people were facing, the government sent out a wave of stimulus checks.  Leaders were hoping the checks would alleviate some of the financial stress, as well as pump dollars into the economy.  Then, there were talks of a second wave of stimulus checks to come.  However, that movement didn’t come to fruition, and what followed was a decision to defer payroll taxes.  On August 8th, the current administration announced what some call a “payroll tax cut,” from September 1st through the end of the year.

Before we get too worked up about the payroll tax cut, we need to pause and look closely at the executive memo.  This is where proper verbiage and clarity are essential in messaging.  So, let’s continue fleshing this out, in order to understand what the payroll tax cut is really all about.

Messaging About the Payroll Tax Cut

Now, before I began writing this post, obviously I had to do a little research.  Ok, I actually had to do a lot of research.  Why? Well, because the messaging was so confusing and seemingly contradictory at times. On one hand, I mistakenly understood the executive order would suspend all payroll taxes.  Another source was telling me the administration will permanently eliminate payroll taxes.  While that may not seem like a big difference, the two concepts are worlds apart.  Furthermore, there are conditional factors that come into play that we cannot ignore.  Case in point, the future legislation will be contingent upon the election.  All this to say, we need to drill down to the facts, and push away all the fluff that will prevent us from understanding what the payroll tax cut is truly all about.

Contrary to what some may say, the payroll tax cut isn’t a complete and permanent elimination of payroll taxes.  At this point, it is actually only a deferral of employee-paid FICA taxes.  A deferral means the employer will suspend withholding of these payroll taxes.  Employees will still have outstanding debt for taxes, but will repay the amount at a later date.  Under normal circumstances, payroll taxes are due based on the accrued payroll tax liability.  So, larger businesses deposit taxes more frequently than small businesses, since they have a heftier tax liability.

Foggy Information

Some things about the payroll tax cut are unclear in the executive memo.  For example, when will the amount deferred need to be repaid?  Or, will it need to be repaid at all?  Again, this decision is still up in the air. Only time will tell if employers must turn to employees to make up the amount owed, or if the government will forgive the debt.

Related:  SPECIAL BLOG: New 2018 Tax Withholding Table & 2018 W4

Stimulus Check vs. Payroll Tax Cut

There is much debate about whether another stimulus check is the better choice over the payroll tax cut.  In fact, that’s how we got to this very situation.  Lawmakers weren’t able to come to an agreement about the best way to relieve financial strain and simultaneously boost the economy.  So, the President issued a series of executive orders to get the ball rolling.

Now, those opposing the payroll tax cut claim it overlooks people who aren’t currently earning a paycheck.  In other words, what about the stay-at-home parents, full-time students, or retirees?  They point out the government sent stimulus checks to most Americans. That is, if they were not claimed as a dependent by anyone else, and if they had filed the appropriate past tax returns.  Their employment status at the time was irrelevant.  Something that complicates this even more is that the U.S. experienced a record unemployment rate of 14.7% as of April 2020.  Taking that into consideration, there are millions of unemployed people who will not benefit from the payroll tax cut, when they had benefited from the stimulus check.

Percentages of Payroll Taxes

So, exactly how much will Americans keep in their pockets through the payroll tax cut?  Well, the answer to that question depends on how much an individual makes.

The FICA tax is Social Security and Medicare taxes combined.  FICA makes up a total of 7.65% of your gross wages.  The breakdown is 6.2% for Social Security, and 1.45% for Medicare.  So, if an employee’s gross wages are $1,000 bi-weekly, the employee could expect to see an extra $76.50 in each paycheck through the end of the year. 

It is noteworthy to point out that there is no mention of deferring FIT (Federal Income Tax). FIT makes up the larger piece of the federal payroll tax pie. Additionally, presumably employers still must pay their portion of FICA. Therefore, employers will continue to withhold FIT from employee paychecks, and payroll providers will continue to make the tax deposits on the employer’s behalf.  So, be aware that this is not complete elimination of payroll taxes, and that your payroll provider will still need to make deposits for you.

Related:  Getting FIT: Learn How Federal Income Tax is Calculated

Eligibility for Payroll Tax Cut

It’s important to include information about who is eligible for the payroll tax cut.  First, an individual must be earning a paycheck.  In other words, there must be payroll taxes to defer.  Second, employee wages must be less than $4,000 bi-weekly, or $104,000 annually.

Payroll Tax Cut Forgiveness

Now, there has been a lot of confusion after hearing rumors that payroll taxes will permanently disappear.  Those claims, however, are simply talk at this point, and no decision has been reached.  Experts caution that permanently doing away with payroll taxes will leave a gaping hole in funding for Social Security and Medicare programs.  What could be permanently forgiven, on the other hand, is the liability remaining after deferring payroll taxes.

The Payroll Tax Cut Takeaway

So, the big takeaway here is that the payroll tax cut is really a temporary tax payment deferral for employee-paid FICA taxes.  Furthermore, there is no guarantee that the deferral will last forever, nor that the federal government will forgive the deferral.  During these ever-changing times, it is of utmost importance to continue reading between the lines.  Being vigilant about seeking accurate information will ensure that you continue to keep your business in compliance with payroll and tax legislation.  Your trusted payroll provider will strive to keep you abreast of the breaking news, so you don’t have to interpret the often confusing information on your own.  You can plan to implement this new policy within the next few weeks, but Journey will let you know about any changes in the meantime.

Image of a woman explaining the payroll tax cut to co-workers.

Subscribe to our newsletter

Get the latest from the world of payroll & HR delivered straight to your inbox!