What Does the Payroll Tax Deferral Mean for Your Paycheck?

On September 1, 2020, the first-ever payroll tax deferral came into place. You may have heard this term several times before, but may not know how it applies to you.

Here, we explain what the payroll tax deferral means and if you will be affected by it.

What Is a Payroll Tax Deferral?

The payroll tax deferral applies to federal employees and employs a temporary suspension of their Social Security taxes. This means that employers won’t be withholding a portion of their employees’ incomes to give to the IRS. This new policy will apply for any income earned between September 1, 2020 and December 31, 2020.

The decision to join or opt out of the deferral program remains with the employer. Therefore, you can only follow along with their decisions to withhold a portion of your income.

The tax deferral also only applies to the Social Security tax, which is 6.2%. It does not include deferrals to state payroll taxes, income taxes, and more. If your employer uses an online pay stub generator, you can easily see this difference as the deferral means your wages will be slightly higher than before.

Employee Eligibility for Payroll Tax Deferral

Not all employees are eligible for a payroll tax deferral. It is only available for people who are earning less than $4,000 biweekly, and for those with less than $104,000 per year.

Again, you may be eligible but if your employer decides not to participate in the deferral, you will not be able to receive this benefit.

Possible Consequences for Employees

If you’ve ever heard of the term ‘there’s no such thing as a free lunch’, keep in mind that it applies here, too. These are some of the areas where an employee will lose out from this policy.

Lower Take-Home Pay in 2021

Any deferred taxes will need to be repaid to the IRS at the beginning of 2021 under current regulations.

To fulfil this, your employer will take out a larger cut out of your incomes for the first four months of 2021, and if these repayments do not meet the required tax payments, you will start facing an interest.

Difficulties in Changing Jobs

How would you repay any tax deferrals if you end up moving from your current job at the beginning of 2021? This question makes the tax deferral process more confusing and complicated for everyone involved.

For the time being, your employer will still be the responsible party in paying back the taxes, but the deadline can be extended to 2022.

What a Payroll Tax Deferral Means for You

While you may not have any control over what your employer decides in regards to the payroll tax deferral, knowing the consequences that may arise – and your overall eligibility – will help you understand what to expect in the coming months.

It is important to note that even if the deferral provides relief today, it may mean harder struggles in the first few months of 2021. Planning your spending according to this knowledge will ensure you won’t run into financial hardship.

Did you find this article helpful? Check out the rest of our blog.