8/10 Update: Over the weekend, President Trump signed a memorandum to stop the collection of payroll taxes from people who earn roughly $104,000 per year or less during the last third of the year (September through December). This is a deferral though, so the taxes will be due next year. As a result, employers will likely continue to deduct the tax from paychecks to remit them to the government in the new year. Trump is pushing for Congress to turn the deferral into an actual cut, but these taxes go toward funding Social Security and Medicare — and Congress is unlikely to jeopardize the vital programs.
It should be noted that Trump’s memorandum applies to the payroll taxes deducted from workers’ paychecks. Congress has already passed legislation that allows employers to delay paying their share of Social Security and Medicare taxes until 2022. It is this legislation that this article explains.
7/10 Update: Since the passage of the Paycheck Protection Program (PPP) Flexibility Act in June, business owners who receive PPP loans that are then forgiven may now defer payment of their share of Social Security taxes per Section 2302 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
As Americans continue to practice social distancing and many businesses stay closed, the CARES Act offers economic assistance both to individuals and businesses. To help employers with their liquidity, the law includes two tax-related provisions: a refundable tax credit and the option to defer payroll taxes. Below, we discuss these payroll tax provisions and explain who qualifies.
Many Americans are also consulting their financial advisors to navigate the recession. To find the right professional, use our free tool, which will connect you with up to three advisors in your area.
What Is Payroll Tax?
Both the federal government and some states collect payroll taxes, which are based on employees’ tips, wages or salaries. These taxes are then used by the government to finance programs like Social Security and Medicare. Employers withhold these taxes from their employees’ paychecks and remit them to the IRS.
Payroll taxes are typically divided into these four categories: federal income, Medicare, Social Security and federal unemployment. The Federal Insurance Contributions Act (FICA) tax pays for the Medicare and Social Security programs. Employees pay 6.2%, up to the wage base limit ($137,700 for tax year 2020) for Social Security, and employers pay a matching 6.2%. Employees and employers also pay 1.45% each for Medicare, up to a threshold ($200,000 for individual filers). Additionally, employees pay a 0.9% Medicare surtax on income above $200,000. Self-employed individuals pay 15.3% as their version of the FICA tax, called the Self-Employment Contributions Act (SECA) tax.
Coronavirus Payroll Tax Delay: How Does It Work?
The CARES Act allows employers to postpone paying their portion of 2020 Social Security payroll taxes to the end of 2022. Self-employed individuals can also delay 50% of the 12.4% of their SECA tax payment (see a list of eligible self-employed individuals here). Under the provision, employers have until December 31, 2021 to pay at least 50% of what is due for 2020, and until December 31, 2022 to pay the remaining amount. Employers can also postpone paying the Railroad Retirement Taxes.
All employers can take advantage of this deferral, even if they haven’t been impacted by COVID-19. As noted earlier, this now includes small businesses that receive a loan under the Small Business Administration’s Paycheck Protection Program (PPP).
Alternative Forms of Coronavirus Tax Relief
The CARES Act also offers employers the Employee Retention Credit – a refundable payroll tax credit that seeks to help employers keep employees on their payroll, according to the IRS. The tax credit is equal to 50% of the first $10,000 of qualified wages that employers pay each employee. This means that the maximum credit for qualified wages paid to an employee is $5,000. It is important to note that the retention credit only applies to qualified wages paid after March 12, 2020 and before January 1, 2021. But which employers are eligible? Under the law, eligible employers must maintain a business or trade during the 2020 calendar year that either:
- Fully or partially suspends operation during any calendar quarter in 2020 due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19; or
- Experiences a significant decline in gross receipts during the calendar quarter
For qualified wages, the rules of the provision vary depending on the number of employees an employer has. For instance, an employer with more than 100 full-time employees can pay an employee qualified wages for the time the employee is not providing service due to either of the following reasons: (1) a full or partial suspension of operations by order of a governmental authority due to COVID-19 or (2) a significant decline in gross receipts. But for eligible employers with fewer than 100 full-time employees in 2019, all employees are eligible.
Coronavirus Stimulus Checks
While you’ll likely qualify for the payroll tax deferral, all employees won’t qualify for the Employee Retention Credit. Government employees and self-employed individuals aren’t eligible. However, the federal government’s coronavirus stimulus package offers most tax payers financial relief in navigating the economic climate. The CARES Act provides direct cash payments for eligible tax filers according to adjusted gross income (AGI).
The stimulus checks range up to $1,200 for individuals and heads of households and $2,400 for couples, and the check amounts decrease and phase out as AGI increases. For instance, high earners making more than $99,000 (for individuals) aren’t eligible to receive a check. And married couples with an AGI of more than $198,000 won’t receive a check either, unless they have dependent children (you get $500 per dependent child). Here is where the most and fewest people will benefit from the COVID-19 stimulus checks.
If you’re an employer (or if you work for yourself), you have the option to defer your 2020 Social Security taxes (or self-employment taxes) to the end of 2022 – or to pay them as usual. The CARES Act allows you to both postpone and split the payroll tax into equal payments over the course of two years. Even if you haven’t been adversely impacted by the coronavirus, such forms of relief are worth considering. As the country works to avoid a recession, both individuals and businesses can take many steps to ensure their financial security.
Tips for Managing Finances During Times of Crisis
- The government’s coronavirus economic support includes paid sick leave, enhanced unemployment benefits, a tax deadline extension and many other forms of aid for individuals and businesses. But to cushion the impact of the slowdown, most Americans will receive stimulus checks (or have already). Our coronavirus stimulus check calculator can help you make sure your payment is for the correct amount.
- Several other establishments are providing relief to individuals and businesses who’ve sustained financial loss because of coronavirus. See our full list of companies helping coronavirus-impacted people.
- A financial advisor can help you protect your assets both in times of certainty and uncertainty. Our free tool matches you with up to three advisors in your area. You’ll just need to complete a short questionnaire, and the tool will do the rest.
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