During 2020, in the face of the COVID-19 pandemic, many workers around the world suffered from job loss, leading to a rise in unemployment. In an effort to slow the spread and ensure that adequate health care was in place for those with the virus, many countries put into place social distancing and lockdown measures. As a result, everyday life began to look very different for many.
Although several stimulus checks were provided by the U.S. government, many of us still suffer due to no consistent source of income. During this time of economic uncertainty, former President Trump had made the decision to assist those suffering economically. His idea was to come up with a payroll tax cut. In this article, we will explore in more detail what the payroll tax cut entails and what it means for employers and employees.
What Does the Payroll Tax Cut Entail?
The payroll tax cut was an executive memorandum by the former U.S. president to exempt anyone making under $4,000 every two weeks from paying Social Security and Medicare payroll tax from Sept. 1, 2020, to the end of the year. Since employees usually pay a tax rate of about 7.65% for Social Security and Medicare, a halt in the collection of payroll tax would mean a small gain in money with each paycheck.
Trump promised that if he were re-elected as president, the tax break would be permanent. However, not only did he lose, but Congress denied the payroll tax cut to be a “cut” and instead turned it into a loan. Once 2021 arrived, employers would need to withhold the funds from their employees’ paychecks to repay what they didn’t in 2020, meaning employees would receive a huge decrease in pay from Jan. 1, 2021, to April 30, 2021. Few were happy with this decision.
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How Does the Payroll Tax Cut Work?
Since its implementation, people have debated how much the payroll tax cut would help. The ones who would likely benefit the most would be those making just under $104,000 a year, while those making less or were unemployed would benefit the least or not at all. In fact, those who are unemployed or retired might have been overlooked during the 4-month period between Sept. 1, 2020, and Dec. 31, 2020, because they rely on Social Security money.
Confusion still abounds. Many employers find themselves faced with several questions, some of their own and others from their employees who are still weathering the financial effects of the pandemic. Some common questions: If employees left their jobs before the end of 2020, how would the funds be made up? Will employers need to pay out of pocket, or will the government assist with that?
Additionally, employers would need to keep track of which employees qualify for the payroll tax cut and withhold their money from their paychecks in 2021. They would also need to explain this to confused employees who may not have heard about the payroll tax cut.
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The Payroll Tax Cut Effects in 2021
Now that 2021 has arrived, how have most Americans handled the results of the payroll tax cut? While most major companies opted out of the payroll tax cut, smaller companies were forced to implement this new system. Federal workers who weren’t making much money may feel the burn of this payroll tax cut, seeing even less money come in through their paychecks as of Jan. 1, 2021.
Fortunately, the IRS has extended the payroll tax due date from April 30, 2021, to Dec. 31, 2021, meaning any punishments for late payments would apply on Jan. 1, 2022, instead of May 1, 2020. The payroll tax can be paid in smaller increments, and less money would be taken out of employees’ paychecks. This will allow for employees to adjust accordingly.
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Payroll Tax Relief Programs
The IRS has provided a few ways to alleviate some of the financial burden on employers through payroll tax relief programs. Thanks to the CARES (Coronavirus Aid, Relief, and Economic Security) Act, employers can defer payment up to two years, and 50% of dues must be paid by Dec. 31, 2021, and the rest paid by Dec. 31, 2022. This only applies to Social Security and not Medicare.
Another benefit of the CARES Act is the Employee Retention Credit. Employers may qualify for this if their business is currently unable to run due to COVID-19 or if there is a tremendous decrease in gross receipts collected in 2020 versus 2019.
There are multiple programs, similar to the Employee Retention Credit, that aid employers by providing credit to sustain them during this time.
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Bottom Line: Understanding the Payroll Tax Cut and Educating Employees
Although former President Trump’s decision to implement a payroll tax cut makes sense and has many benefits, some employees may still feel skeptical. Due to the pandemic, many are experiencing financial problems, seeing a decline in wages or being let go from their positions altogether. For such people, the thought of having to repay the “loan” associated with the payroll tax may be a great source of anxiety. Stimulus checks and other forms of financial relief (i.e, forbearance of federal student loans) have helped ease some of these anxieties.
Employees curious about their current situation are advised to speak with their employers. With that in mind, it would be behoove employers to understand this payroll tax cut thoroughly so they can offer their employees clear guidance.
More information about the payroll tax cut can be found on the official website (https://www.irs.gov/) of the Internal Revenue Service (IRS).
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