Workers Eligible to Defer Payroll Taxes for Remainder of 2020

Posted on 09/08/20

pay later stamp on top of paycheck, pay statements, wallet, pass

Extra money in paychecks this year must be repaid in 2021; AARP opposes deferrals

Some workers may see a temporary boost in their take-home pay for the last four months of 2020 by deferring the collection of payroll taxes that go toward funding Social Security. However, their employers would have to participate, and the extra money in paychecks would need to be repaid in early 2021, according to guidance issued by the U.S. Department of Treasury and the Internal Revenue Service (IRS).

A presidential order issued on Aug. 8 will allow workers who make $4,000 biweekly or less to temporarily stop paying their 6.2 percent portion of the payroll tax from Sept. 1 through Dec. 31. Workers would have to repay those taxes eventually, either in one lump sum at the end of 2020 or by paying extra payroll taxes during the first four months of 2021. The 1.45 percent payroll tax that goes toward Medicare would not be deferred.

Workers with $50,000 in annual income that's subject to Social Security payroll tax may see an extra $119.23 in their biweekly paychecks the next four months, according to calculations from the U.S. Chamber of Commerce. Those workers would owe a total of $1,073.08 (based on nine pay periods) to Uncle Sam on Dec. 31, which they could pay in full. They could also add $119.23 to their biweekly paychecks during the first four months of 2021 to repay their deferred payroll tax.

The Treasury Department is charging no interest on the deferred taxes, but penalties and interest would start to accrue on taxes not repaid by April 30, 2021.

Opposition to payroll tax deferrals

Just how many private employers are willing to update their payroll systems to enable workers to defer part of their payroll taxes is an open question. “Many of our members will likely decline to implement deferral [of the payroll tax], choosing instead to continue to withhold and remit to the government the payroll taxes required by law,” the U.S. Chamber of Commerce said in a letter to the Treasury Secretary and Congress. The letter was signed by more than 30 trade organizations. U.S. government employees will have their payroll taxes deferred automatically.

AARP has opposed any suspension or deferral of the payroll tax, which would not help unemployed workers and could, potentially, undermine Social Security's funding. “As we stated in a letter to President Trump last week, AARP believes that suspending, reducing or eliminating the contributions to Social Security made through the payroll tax will interfere with Social Security's long-term funding stream. This is consistent with the concerns we addressed to President Obama in 2012, that payroll tax holidays ‘undermine confidence in Social Security and put at risk the program's dedicated funding stream and the hard-earned benefits of millions of Americans and their families,'” Nancy A. LeaMond, AARP's executive vice president and chief advocacy and engagement officer, wrote in an Aug. 18 letter to Treasury Secretary Steven Mnuchin.

The president has promised to “terminate,” or forgive, the payroll taxes deferred from September through December. He has also said in an Aug. 12 press briefing that if he is re-elected in November, “we are going to be terminating the payroll tax after the beginning of the new year.” On Aug. 13, AARP CEO Jo Ann Jenkins sent the president a letter asking for further explanations about the administration's remarks about eliminating the dedicated funding for Social Security.

"The foundation of Social Security, for 85 years, is that workers and employers pay into the program, and workers earn their benefits,” Jenkins says. “AARP believes permanent elimination of payroll contributions would put Social Security benefits at risk for both current and future retirees."

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