A month ago, Journey reported on the current administration’s announcement there was soon to be a payroll tax cut. The idea was in response to the decision not to send out another wave of stimulus checks, while still attempting to alleviate some of the financial stress American citizens are feeling. The tax cut would allow employees to forego paying the Social Security tax each pay period. As far as the timeframe, it was supposed to go into effect from September 1st, and continue through the end of the year. Furthermore, there was a possibility the tax could be forgiven. Now, however, the administration confirmed this tax cut is not so much a cut, but a postponement of paying the tax. In other words, this is a Social Security Tax Deferral.
Journey was quick to point out that the devil is in the details, so we should all be sifting through the rhetoric using a microscope. Here again, Journey is ready to help you identify the most noteworthy aspects of the Social Security Tax Deferral.
Deferral Not Elimination
So, let’s be clear: The Social Security tax deferral is not a permanent elimination of the Social Security tax. It is simply a deferral, and a deferral is a postponement. The deferral period will still be from September 1st through December 31st, which means Social Security taxes would not be withheld from employee paychecks during that time. However, employees will be responsible for paying it back thereafter.
The Social Security Tax Deferral and the Paycheck
Now, it is unclear how the Social Security tax deferral will actually affect employee paychecks starting in September. In a straightforward manner, employees pay the Social Security tax in the amount of 6.2% through the tax withholding from their paychecks. For example, if an employee’s gross paycheck is $1,000 per pay period, the employee would theoretically have an additional $62 per pay period in her paycheck. Paid biweekly, the employee would see an estimated $500 more over the course of the next four months. However, the employee would need to repay the deferred amount in 2021. Notably, only employees earning $104,000 or less are eligible for this tax deferral.
Optional or Mandatory
Despite the announcement, there have been whispers that some employers might choose to ignore the dispatch, and continue collecting the Social Security tax as they normally would. Among the reasons why employers wouldn’t want to go along with the deferral, there would be additional measures their payroll departments would need to put in place to make this happen. Furthermore, they don’t feel confident the deferral would greatly help employees, since the increased take-home amount is so little. Also, they might experience backlash in January, when employees see that they would be paying more in taxes to offset the deferral from 2020.
Still, in order to remain in compliance with the law, they are waiting on the Treasury to communicate if the deferral is optional.
Social Security Fund Concerns
It is also unclear if the Social Security tax deferral will negatively impact the Social Security fund. Some claim it won’t, since this is only a deferral. Now, only time will truly tell if this action will deplete the national trust fund that is already at risk. Specifically, if the current administration and Congress ultimately decide to forgive the accrual of taxes as a result of the deferral, the Social Security fund could indeed see a dip. This is concerning because retirement benefits come from the Social Security fund. Still, the current administration vows to protect both the Social Security and Medicare funds. So, presumably a separate spending bill would make up any lost funds.
Period of Postponing and Deferrals
As our country ventures into the seventh month of the pandemic, it seems our MO is postponing and waiting. There are a lot of unknowns, and we keep looking to the experts for guidance. Even the experts, however, seem stupefied by the current state of our country as a result of the pandemic. This is evident by the confusion surrounding the Social Security tax deferral. So, we could best describe this time period as a very long holding pattern. Nevertheless, we must continue to seek solutions for the challenges we are facing, even if the solution isn’t perfect, otherwise many people will suffer great loss. Our hope is that we can play our part in minimizing loss by passing along information intended to help you continue to operate your business. We don’t want you to feel like you are in a constant state of deferral.
As always, Journey is here to partner with you to keep you ready to face the future, whatever it brings.