UPDATE: Payroll Tax Deferral

Dark Horse CPA

On this tax update episode, we explain the ins and out of the social security tax deferral that was put into place by President Trump’s Executive Order earlier this year.

Podcast Transcript

Welcome back. Everyone to taxes made simple where we take complex tax issues and sum  them up in terms that are easy to understand for the average individual. And one of the  things we like to do in this podcast is research. What people are searching for on the  internet when it comes to tax topics, and then take those topics and touch on them. 

In our episodes this week, a popular search has been payroll tax deferrals. So with  me today is chase Berkey, CEO of dark horse CPAs. And we’re going to dive into payroll tax  deferrals. So chase welcome. Thank you for being here. Thank you for having me. Um, look,  we, um, we talked about this a little bit in one of our first episodes, but something that  Trump put in place a while ago was this payroll tax deferral. 

Tell me a little bit about what that’s all about and so we can understand kind of  the context of this, of this search topic. Yeah. So actually this was an executive order that  dates back to August, uh, where Trump was essentially trying to do whatever he possibly  could in order to generate some economic relief. 

And he couldn’t actually get Congress to do an actual payroll tax holiday, which  really just means cutting the tax for a period of time. Uh, actually, uh, former president  Barack Obama did this, you know, years ago, uh, during his presidency. Uh, but. But Trump  was actually able to do it. Instead of getting that payroll tax holiday was he was able to  create a deferral of social security taxes for the last four months of 2020. 

And the idea is that this would be paid back via additional paycheck, withholdings  starting in January of 2021. Through April. Uh, and he was actually able to do this unilaterally  because it didn’t actually cut taxes. And his promise was that if he got reelected, he would  see to it that the debt, you know, in the form of the deferral, uh, got forgiven by Congress. 

Well, it’s pretty, I mean, it’s kind of up in the air right now, whether or not it’s  getting reelected, but let’s just make an assumption that he is not getting reelected. And will  not be an office in January what’s going to happen. Yeah. So, I mean, I guess it depends on  who you ask, but yeah, it’s extremely unlikely that he’ll be in the oval office after January  20th. 

So Congress is now left with a decision as to whether they are going to forgive the  deferral or let it ride as is, you know, on one hand, the repayment will further hamper  economic activity, but on the other hand, forgiving, it would cost the government money  and would be unfair to those who did not have the opportunity to defer the taxes. 

So speaking of that, who had the opportunity to defer the taxes? Actually, there’s  very few employees to be honest Paychex, which is one of the largest payroll companies out  there reported the employer. Adoption was extremely low except for the federal workforce,  you know, which is going to include members of the military. 

And those folks didn’t even have a choice. The deferral happened automatically  and they couldn’t opt out. And that’s actually, what’s putting pressure on Congress to act, 

you know, to forgive this debt because it’s workers in the public service arena that would be  impacted by this. And Justin, I know that you watched dark horses, weekly video series this  week, this morning, and here’s a shameless plug. 

We were telling people as soon as that executive order happened, that they  should defer the taxes if they had the option to do it and put that money in a savings  account, just in case Congress didn’t forgive the deferral. And if they do then, you know, you  have yourself your own personal stimulus check. 

So anyway, it wouldn’t be totally unfeasible that Congress would forgive those  taxes. And provide a tax credit for social security taxes paid by those who would have  otherwise been eligible during the last four months of 2020. But with that being said, I  certainly wouldn’t bet on that. And I would not take that to the bank, but I mean, this  doesn’t sound like that bad of a, of an option. 

So w why were employers so against providing it? Yeah. I mean, it’s mostly  because of the cost, you know, time that would be required to administer it. A lot of things  would have to be changed in payroll, you know, to make that happen as well as, you know,  in 2021 to get those extra, um, You know, uh, withholding’s taken care of, uh, also, you  know, there’s a perceived pretty minimal benefit to each individual employee. 

Uh, and then also really probably the biggest thing here is that the employer  would essentially be on the hook to repay the taxes. If the employee left the company  before repaying the taxes themselves in 2021. Well, you just mentioned something there,  the minimum benefit. So I’m curious, what is actually the highest amount in the, in social  security taxes that could be deferred per employee. 

So the maximum, the very highest amount that any one person could have  deferred was $2,149. Got it. And just so I’m very clear. This was only for social security taxes,  right? Not Medicare. Exactly. So it’s not the whole FICA, just social security. And that carries  a 6.2% tax rate to both the employee and the employer. 

And so this tax deferral was actually just on the employee side. And what about  those people that are self-employed? Do they get to benefit from this actually? Yeah. And  this also includes household employers who file a schedule H so both are allowed to defer  50% of the 12.4% social security tax that they pay via their self-employment taxes, uh, for  income earned from March 27th through the end of the year. 

So in reality, what this means is that they’re required quarterly estimated tax  payments, which include income taxes as well as self-employment taxes have been reduced  by that amount of the deferral. But they’re still going to have to pay the entire self employment tax bill, uh, for tax year 2020, when they file, you know, likely in the spring of  2021. 

And that is unless Congress eventually says otherwise and decides to, uh, forgive  that deferral. Got it. You know, there’s one last group of runners out there. The higher  earners are they allowed to defer as well. So anyone who is making over $104,000 was  actually left out of this. Uh, but that actually ended up being mostly inconsequential because 

by the time the deferral was enacted, which was, you know, the latter half of 2020, any high  income earner would have really already exceeded or been very close to exceeding the  social security wage base. 

Um, and you know, really what that means is that they would have had no social  security taxes to defer because the 6.2%. Stops after you earned wages of $137,700. So, you  know, a lot of those folks would have had just a very minimal deferral, if anything at all,  because by that point they weren’t, we’ve already exceeded that wage base. 

Just bad timing, bad timing. Terrible. I know. Well, thanks, chase. You know, that  was all very informative. So. What should those who actually are impacted by this deferred  social security tax be looking out for what is their next step? Well, they could and probably  

should start by subscribing to this podcast, as well as our weekly video series that I  mentioned earlier this week, this morning, which is on YouTube. 

And the easiest way to find those videos is by going to this week, this  morning.com. Awesome. Well, thank you, chase. Look. The one thing I love about you guys is  how much value you provide out to your audience, right? Whether it’s through this podcast  or through your weekly video series, there’s, there’s tons of value for the average individual  to educate themselves on certain tax implications and tax planning needs. 

So thank you for that and thank you for this wonderful podcast. Um, check us out  next week, where we’re going to be talking about. Stock compensation and the impact of  stock compensation on your personal taxes. It’s going to be very interesting, a light episode,  just covering overview of topics regarding stock compensation. 

So excited for that one next week. And thank you chase for your time today.  Yeah. And now for the disclaimer, the content in the proceeding podcast should not in any  way be construed to be tax advice. All tax laws are nuanced in. Those are applied to each  unique situation differently. There’ll be a dummy higher CPA. 

Preferably a darker CPA.

Keep Listening

What To Do About the 43.4% Capital Gains Tax Rate

4 Min

The Biden Administration will be doubling the long-term capital gains tax rat... Listen now

Restaurant Revitalization Fund Grant Program

3 Min

If you own a restaurant or bar, you need to be aware of the Restaurant Revita... Listen now

What Does the American Jobs Plan Mean for Taxes?

3 Min

Hint: You’re probably not going to like the answer...

... Listen now