Prior to the start of a project, it is smart for subcontractors to ensure that…
If you noticed an increase in your paycheck beginning in mid-September, you’re not the only one. As a result of President Trump’s August 8th Memorandum for the Secretary of the Treasury, payroll tax, which equates to 6.2% of an employee’s pay, is deferred beginning September 1, 2020, and culminating on December 31, 2020. This deferral applies only if wages or compensation are less than $4,000 for a biweekly period, or in an equivalent amount for other pay schedules. It is important to emphasize that this is simply a deferral rather than forgiveness; the amount deferred will indeed have to be paid at a future date, unless Congress were to step in and approve legislation to forgive the deferred tax.
The result of this Executive Order is that employees are seeing an increase in their paychecks, since 6.2% of an employee’s pay that is normally withheld is being deferred. Therefore, paychecks will be elevated until the end of 2020. However, this increase in pay in the short term is not without a decrease in pay over a longer term. Beginning January 1, 2021 and extending until April 30, 2021, taxes deferred from September 1, 2020 until December 31, 2020 must be paid by the employer. If this tax is not paid, interest, penalties, and addition to tax will accumulate as to any tax unpaid by the employer beginning May 1, 2021. Thus, expect to see a decrease in your paycheck during the first few months of 2021. However, some private employers have opted-out of this payroll tax deferral. Therefore, it is important to monitor your paycheck during the month of September to determine whether or not your employer is engaging in payroll tax deferral.
Overall, while it may be necessary to have additional funds as the Coronavirus Pandemic continues, it is important to be aware of the additional taxation that will come as the calendar flips to 2021. Thus, it may be a good idea to store away additional funds, if possible, to account for the increased amounts to be withheld from your paycheck for the first four months of 2021.
By: Zachary N. Layne