The COVID-19 Pandemic has certainly had a financial impact on us all: Businesses have been closed – some of them permanently – countless employees have been furloughed if not let go entirely, and we’re afraid of what might happen next.
In a recent Executive Order, the President has suspended the Federal Payroll Tax, deferring the 6.2 percent payroll tax that funds Social Security in hopes of bolstering consumer spending and ultimately stimulating an economy that is still struggling under pressure from the systemic, lasting shutdowns across the nation.
But what does all that mean for the American people?
First, a little information is necessary, here: Every payday, 7.65% of your wages are subtracted from your paycheck to fund Social Security and Medicare (6.2% for Social Security; 1.45% for Medicare). Your employer – or if you are the business owner – pays an equivalent amount of tax.
It’s noteworthy that employers already can defer payment of their share of Social Security taxes on wages paid through the end of the year. For 2020, the Social Security tax is only levied on the first $137,700 of earnings; however, an additional 0.9% Medicare tax is collected on wages over $200,000 for the year.
Now, under the Executive Order, under the president’s executive order, Social Security taxes (6.2%) won’t be taken out of your paycheck if your pre-tax bi-weekly salary is $4,000 or less – for the remainder of 2020. This means that someone making $10 per hour and working 40 hours per week will get about $25 more per week, or around $100 per month. From September through December, that will add up to about $446. A full-time worker making $15 per hour would get approximately $37 more per week, $149 more per month, and $670 by the end of the year. For someone making $25 per hour, the savings will be about $62 per week, $248 per month, and $1,116 through December, and so on.
But – and this is especially important to all taxpayers – the IRS reports reiterate that this Executive Order only applies to the rest of 2020, and as such, postpones the due date for these taxes until April 30, 2021. After that date, penalties, interest and “additions to tax” will begin to accrue.
The IRS guidelines do state that Employers – referred to as the “affected taxpayers” in the documentation issued – “may make arrangements to otherwise collect the total applicable taxes from the employee.”
But make no mistake; the IRS will collect those deferred and accrued taxes as soon as they are legally able to do so.