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For small businesses, payroll taxes are the biggest cost each year. While some may remember tax cuts for the rich and large corporations in 2021, this report argues that the new corporate tax plan is actually a major boon for small business owners.
Former President Trump signed an executive order on Aug. 8, 2020, suspending the 6.2 percent Social Security levy for qualified workers earning less than $104,000 per year. While most firms may choose whether or not to stop employee withholding, government workers and active-duty military people were forced to participate. Deferred taxes were supposed to be returned starting Jan. 1, 2021, and ending April 30, 2021, according to the initial ruling, but it was extended until the end of 2021.
Who is Affected by the Payroll Tax Cut?
The Memorandum on Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster is the official name of President Trump’s executive order. This temporary tax break was just for workers, not for the employer component of Social Security payments (the CARES legislation allows businesses to delay payroll taxes, which we’ll discuss later).
This presidential order has an impact on your payroll process since employers are effectively payroll tax collectors. If your company chose to delay employee Social Security taxes, you most likely engaged with your payroll department or a third-party supplier in the fourth quarter of 2020 to alter withholdings. Employers will be required to withhold extra payroll taxes from employee paychecks until 2021 to make up for the postponed amounts.
When Does the Payroll Tax Cut Become Effective?
The payroll tax freeze was in effect from September 1, 2020, until December 31, 2020. Employers were supposed to start withholding Social Security payments again on Jan. 1, 2021, and delayed taxes were supposed to be returned by April 30, 2021, according to the original memorandum.
The Consolidated Appropriations Act of 2021 (signed on December 27, 2020) extended the payback term to December 31, 2021. As a consequence, the amount withheld from each paycheck to collect delayed taxes will be lower and less harmful to workers than under the previous timeframe.
Deferred Social Security taxes must now be reimbursed by Jan. 3, 2022, at the latest, due to a federal holiday on Dec. 31, 2021. On January 1, 2022, any employer penalties and interest on unpaid deferred taxes will begin to accumulate.
What Impact Did the Payroll Tax Holiday Have on Employee Paychecks?
The original intention of the tax freeze was to increase employee checks during the economic strain brought on by COVID-19. However, because of the lack of guidance surrounding the order, many employers opted not to alter employee Social Security withholdings. In fact, a large number of employers—including businesses like UPS, Proctor & Gamble, H&R Block, and BlueCross BlueShield of Tennessee—chose not to take part in the payroll tax holiday.
Nonetheless, since government companies were compelled to participate in the holiday, the freeze affected all federal workers and active-duty military members. Here’s an example of affected paychecks in the fourth quarter of 2020 to demonstrate the effects of the holiday on an employee:
Jennifer is paid $2,500 twice a month on gross salary. Her boss usually deducts $155 from each of her paychecks. Her biweekly check grew to $2,655 every two weeks as a result of the payroll tax moratorium. Ultimately, she got an extra $310 in her paycheck each month, totaling $1,240 during the payroll tax break.
Deferring vs. Forgiving Social Security Taxes
While former President Trump’s payroll tax break is frequently known as a tax reduction, it is really a tax deferral. The presidential order did not specifically specify that the tax bill would be forgiven; in reality, for the delayed payroll taxes to be forgiven, Congress would have to pass legislation, not merely an administrative order. As a result, any Social Security taxes you didn’t withhold from September 1, 2020, to December 31, 2020, must be repaid by your workers.
To make up for the postponed sums, employers will have to collect more Social Security tax from employees’ paychecks. In the scenario above, Jennifer owes the IRS $1,240 in taxes, which must be withheld from her paychecks from January 1, 2021 through December 31, 2021.
How to Collect Employees’ Deferred Taxes
If you opted to take advantage of the payroll tax break, you’ll have to make up for the taxes you didn’t pay by collecting higher Social Security taxes in 2021. Keep in mind that if an employee’s job is terminated before his or her tax deferments have been reimbursed, the procedure may be different. You may deduct the employee’s overdue Social Security taxes from his last payment in this situation. You may be accountable for repaying such sums if the employee’s last salary is inadequate to satisfy the remaining debt.
If you do your accounting in-house, each holiday deferral should be recorded as a receivable (from each employee) as well as a liability (to the IRS). This is why, unless you want to report a loss, you’ll have to collect all of the deferred taxes from workers.
Employers’ Reactions to the Tax Cuts
While some company owners anticipated that individual workers may opt in or out of the deferral, employers ultimately choose whether or not to partake in the holiday. Many firms elected not to participate since the payroll tax holiday was a delay rather than a complete tax relief.
This was mostly due to concerns that the move would put their workers in a financial bind when the deferred taxes were due to be repaid. Employers were further put off by the possibility of being held liable if the postponed sum was not recouped from future employee paychecks.
Employer-Portion of Social Security Taxes Payroll Tax Deferral
As a small company owner, you’re undoubtedly also curious about the tax benefits available to you. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act, or the Act) entered into force in March 2020, after the emergence of COVID-19. Employers were given a postponement of the 6.2 percent employer-portion of the Social Security tax under the Act, comparable to the payroll tax decrease given to workers.
Employers were not obliged to include the money in their quarterly employer tax payments if they paid Social Security taxes between March 27, 2020, and December 31, 2020.
What If I Told You.
You may delay half of your employer’s Social Security taxes payable in 2020 to December 31, 2021, and the other half to December 31, 2022. As a result, for qualifying firms, the CARES Act payroll tax deferral is basically an interest-free loan.
Employers were also given the option of opting out of the deferral entirely and paying the monies in their normal tax payments instead.
Employers Who Were Eligible for the Deferral of Employer Payroll Tax
The payroll tax deferral was available to all businesses, including those with paid leave credits and employee retention credits. This was a revision from the Act’s initial wording, which prohibited employers that earned CARES Act tax incentives from participating.
Taking Advantage of the Payroll Tax Deferral
For Quarters 2 through 4, 2020, a modification to Form 941 (the IRS form companies use to report quarterly payroll taxes due) was enacted. Employers were needed to put any Social Security tax they wanted to withhold on line 13b to defer for that month.
Employers who delayed any Social Security taxes between March 27 and March 31 were required to pay a portion of the sum due in Quarter 2 in order to get a notice from the IRS indicating the disparity. The shortfall might thus be attributed to a postponement, according to the business owner.
Frequently Asked Questions
Do I have to pay back the payroll tax cut?
Yes, you will have to pay back the payroll tax cut that was given to you.
Is there a payroll tax cut 2021?
The payroll tax rate is the portion of your income that you pay to the federal government, and it currently relies on an old way of calculating taxes.
