With businesses and the economy shutting down, people were demanding to know how they were going to mnage financially from month to month. And please recall that by May of 2020, the government had issued stimulus checks and had passed a $3 trillion aid package known as the CARES Act.a
The payroll cut was first discussed within this blog back in May of 2020. The reason why it was brought up back then was that it was being heralded as a compromise.
Let me explain: By May of 2020, people were starting to look at the COVID-19 pandemic as a long-term problem. A two-week shutdown was not going to rid the country of the virus. It didn’t. It hasn’t.
Economic conservatives were not eager to add more debt, but they were also aware that Americans didn’t have enough money.
One solution was to cut the payroll tax. Payroll tax is something that gets paid by both the employer and the employee to the tune of 6.2% each.
Instead of giving money to the American people, the government was saying it would take less. Regardless, it would give people more money while their cash flow was very limited.
The argument against it was that the payroll tax provides $805 billion towards Social Security. If the government stopped the payroll tax, then how would the social security funds be made up?
People have been waiting to see if the payroll tax would get. And it has—sort of.
Last Friday night, on August 28, 2020, the Treasury Department provided some much-anticipated information regarding our payroll taxes.
Employers can now choose to delay paying them from September 1, 2020 to December 31, 2020—the rest of the year. However, this only applies to make less than $4,000 bi-weekly or $104,000 a year.
If we’ve been writing/asking about the payroll tax cut since May, then why are we just now hearing about it? The question that was cause for delay, as it appears, was whether the payroll tax would be canceled for a period of time, or if they would be postponed.
Because that money fueled Social Security, there was no clear way as to how that money would be made up.
The answer to this question could be problematic for some businesses. It is this very reason that you will need to consider if you opt into a payroll deferment. According to the Treasury Department, their advice seems to be if your business doesn’t withhold the payroll taxes until December 31, 2020, then that same small business will have to collect double from January 1, 2020 until April 30, 2020.
That’s a rather quick turnaround. If you spent the money you saved, you would be expected to have paid off in full by the end of April. Hypothetically, it wouldn’t be unreasonable if the money you saved got stashed away solely to be paid back.
No matter how you cut it, it is a zero sum gain.
There is also a very important question that remains to be answered: what if the employee is no longer with the company in 2021? If that employee kept the money from the tax break and then quit at the end of the year, who is to pay back the deferred taxes?
That question has not been answered. Some employers might be worried that they will have to cover the losses. Not only will they pay their half, but they might be obligated to pay back an additional 6.2% on behalf of the employee who no longer works for the company.
Payroll, which can be complicated, has been made harder with the laws and policies introduced in 2020. Manage your payroll with confidence and ease. When your books are solid, you can sleep easy knowing you have the organizational skills to tackle any of 2020s financial hurdles.