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.
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.