Is Payroll Tax Deferral Worth It?

Many American businesses defy President Trump's directive to cease deducting Social Security taxes from their employee's paychecks. They claim that the strategy is difficult to grasp and would not help their businesses or employees save money in a meaningful way.

On August 8, Trump signed an executive order allowing employers to stop deducting most payroll taxes from employees earning less than $104,000 annually. The order will impact earnings from September 1 until the end of 2020. However, there is a catch. The tax is postponed, not eliminated. You must still pay it, and you have till the end of April 2021 to do it.

For the Social Security taxes that weren't deducted during the holiday, participating employees had to pay twice as much between January and April. You may also start a savings account and deposit any extra money from your paychecks to compensate for lost time in January.

Businesses can decide whether or not to join, but federal employees, like those in the military, must. They can't leave since Trump told employees to follow the plan. This means that from January through April of 2021, most individuals will have an additional 6.2 percent deducted from their paychecks to make up for what they don't pay between now and December 31.

Benefits from payroll tax deferral

The payroll tax cut is beneficial because it provides workers with more money each time they are paid. Workers will most likely use the extra money to assist the weak COVID-19 economy recovery. People have stated that if Trump is re-elected, the owing tax would be pardoned sometime in 2021.

However, Congress would have to accept that, which is doubtful given that neither the Senate nor the House of Representatives supports the concept. In 2020, a 12.4% payroll tax of up to $137,700 will be levied. Employers and employees both contribute 6.2 %. Since Trump signed the CARES Act last spring, employers have been exempt from paying their share of the tax.

The decree extends from August the temporary reduction for the worker's portion of the tax. Employers are not required to stop withholding taxes from employees' paychecks and are unlikely to do so. Any assistance provided by the scheme would be only temporary, and companies would still be responsible for paying the tax after the program expired on December 31.

The Downsides of Payroll Tax Deferral

Trump claims that the tax break will provide workers with more money and assist the economy in recovering from the Covid-19 issue, but critics fear it may cause problems next year when workers' wages are reduced to compensate for the tax that was not paid.

The decision does not specify how the tax deferral would be paid. Some, though not the majority, of employers may continue to deduct payroll taxes from their employee's paychecks and remit them to the IRS just at the end of the year.

There are still several unsolved questions. Some members of Congress have stated that Trump is violating the Constitution by declaring a tax holiday, and they may fight to prevent it. It's also unclear what would happen if employees resigned before paying the levy.

Perhaps the employee's previous employer must pay the tax on their behalf, or the employee must pay it on their Form 1040 return for income taxes. So far, the US Treasury Department has not issued any guidance on these concerns, leaving employees of companies that have stopped withholding the tax in the dark.

Will their companies deduct a large portion of their income at the end of the year, or will the increased amounts be phased out throughout the first few months of 2021? The measures have not yet been specified, but according to Bloomberg News, the White House wants businesses, not employees, to pay the tax when it becomes due next year.

It's difficult to say how much the tax holiday would boost the economy because it's more like a loan with no interest than a tax break. Some employees with extra time may now spend more money. Employees may struggle to make ends meet if they spend the money without saving for a likely tax burden in 2021.

Again, whether the business or the employee will be required to pay the IRS is unclear. Employees may be given the option of choosing how to pay back taxes. They may pay it all at once at the end of the year, or their employers might deduct extra money from their paychecks starting in 2021. People who work for companies that postpone payroll taxes should expect a bigger tax bill or less money in early 2021.

The excess money from the withholding moratorium may be best saved in a bank account. Another source of concern is unrelated to business or personal finances. For the time being, the postponed money won't be deposited into the Social Security trust fund, and a government reserve used to provide retirement payments to tens of millions of Americans.

Trump's order to postpone payroll taxes should not result in a halt to Social Security financing. Just putting it off for now. However, Trump has declared that he wants Congress to permanently reduce the payroll tax. If that happens, the trust fund for Social Security which is already in bad shape may suffer a major hit, reducing the income of many pensioners.