With one of the latest strokes of his pen, President Trump issued a memorandum to the Secretary of the Treasury authorizing the temporary deferral of social security and medicare withholding taxes. Its a relatively straight forward option: Pay it now or Pay it later.
While to many employees and employers, deferring taxes may seem like a great idea. Consider this choice really carefully. The option exists for the employer to make. Employees may want it; however, we don’t believe it’ll be in the best interest of those employees.
Essentially, from September 1 through December 31, 2020, employers may defer 100% of the “social security” taxes of employees. Obviously, that’s a nice, albeit an illusion, paycheck increase. It’s not for every employee either! Only those employees with “generally less than” $2,000/week of gross payroll will qualify, (that’s about $104,000 annually). That can be up to $153/wk more in an employee’s net paycheck. The tax rate for the employee’s portion of the “social security” tax is 7.65% of gross payroll. The cap won’t be reached given the restriction on the eligible employee’s gross payroll.
There’s a catch!! Employees have to pay the deferred tax between 1/1-4/30/2021. This isn’t stimulus. This isn’t free. Granted, there won’t be penalties or interested assessed for paying it later. However, it will need to be paid. What’s the mean? For the employee who has $153 per paycheck deferred now, he or she will have the $153 deducted in addition to the current taxes with each paycheck until the deferment is repaid.
There is a provision in the memorandum that suggests the deferral might be forgiven. Don’t hold your breath waiting though. This sounds like a wonderful election promise. One that may not become ripe.
Read the full content of the President’s memo.
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