In response to President Trump’s August 8, 2020, memorandum to the Treasury Department, the IRS issued Notice 2020-65, which allows employers to suspend withholding and paying to the IRS certain employees’ Social Security payroll taxes (6.2% for each the employer and employee), beginning on September 1, 2020, and running through December 31, 2020.
While participation this payroll tax “holiday” is optional for employers (that is, your employer may choose not to take part), eligible employees – those whose wages are less than $4,000 per bi-weekly pay period, or $104,000 per year – should be sure to examine their paychecks (or ask their payroll department) to determine if Social Security withholding has been suspended for the relevant period.
While this “holiday” may be of temporary benefit to workers during the COVID-19 crisis, it is critical to be aware that this program is only a deferral of those taxes, and (absent legislation action to the contrary) the amounts not withheld now will need to be paid back later. Specifically, after the 4 month “holiday”, employers will be required to withhold from their employees’ paychecks the amounts not withheld during the “holiday” ratably over the next four months (January 2021 – April 2021) – so, while you might benefit from four months’ worth of a paycheck that is 6.2% higher than normal for the rest of 2020, in the first four months of 2021, your paycheck will be 6.2% smaller than normal, since your portion of the Social Security payroll tax will (once again) be taken out normally, and then again to repay the amounts not taken in the Fall.
For example, let’s say you are single, have a bi-weekly paycheck of $2,000, standard withholding, and your employer opts to participate in the payroll tax “holiday”. Without any Social Security payroll tax suspension, your paycheck (not considering retirement, HSA, or similar pre-tax reductions) looks something like this:
Base Wages $2,000
Federal W/H $ 246
Employer Social Security $ 124
Your Social Security $ 124
Employer Medicare $ 29
Your Medicare $ 29
Total Net Pay $1,448
During the payroll tax “holiday” (from September through December, 2020) your employer would not withhold your portion of the Social Security payroll tax from your pay, so your bi-weekly paycheck would increase to $1,572:
Base Wages $2,000
Federal W/H $ 246
Employer Social Security $ 124
Employer Medicare $ 29
Your Medicare $ 29
Total Net Pay $1,572
However, for the months of January to April, 2021, your employer would not only withhold the regular amount of your portion of the Social Security payroll tax, but also a ratable portion of the amounts not withheld during the payroll tax “holiday” from September to December:
Base Wages $2,000
Federal W/H $ 246
Employer Social Security $ 124
Your Social Security $ 124
Additional Social Security
W/H to Repay Suspended
Amounts $ 124
Employer Medicare $ 29
Your Medicare $ 29
Total Net Pay $1,324
So, if you find a little extra in your next eight paychecks, be advised that this is more like a short- term, interest-free loan, not a permanent windfall; bear in mind that your first eight paychecks of 2021 will be smaller, and you should budget accordingly to guard against any financial difficulty that the increased payroll deductions applied in 2021 might cause.
By Jonathan Becker, Esq.
Jonathan Becker is an Attorney with the law firm Eckell, Sparks, Levy, Auerbach, Monte, Sloane, Matthews & Auslander, P.C. For an initial consultation, complete our online form or call us at 610-565-3701. Located in Media and West Chester, Pennsylvania, we serve clients throughout Delaware County, Chester County, and Montgomery County.