President Trump signed the executive order—Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster. The tax deferral on Social Security taxes began on September 1, 2023, and will continue to be deferred until the end of the year. The uncollected Social Security tax will be collected starting from January 1, 2023 to April 30, 2022.
Since the tax deferral applies to three months of tax and it will be collected in a five-month period, this will be a short-term solution amidst COVID-19. So, what does the tax-deferral means?
In this article, we will tell you everything you need to know about the Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster.
What is Social Security payroll tax deferral?
From September 1, 2022 to December 31, 2022, Social Secuiryt taxes won’t be collected from qualifying employees’ income. The purpose of this is to allow employees to have more cash flow as means for additional relief.
If you’re working through the coronavirus pandemic at the moment, the deferral on payroll tax obligations will mean a 6.2% increase in your paycheck per pay period until the end of 2022.
However, not every employee is qualified for this. If you’re making more than $104,000 a year in gross income, Social Security tax will be withheld from your income. This is roughly:
- $2,000 for weekly paid jobs
- $4,000 for bi-weekly paid jobs
- $8,500 for monthly paid jobs
If you’re making more than the amount above per pay frequency, your employer will continue to collect Social Security tax from your income. Therefore, you aren’t covered by this program.
Payroll taxes that aren’t deferred
The executive order did not include the employer portion of Social Security tax as well as Medicare taxes on both ends. So, you will still pay a 1.45% Medicare tax.
It’s also good to note that the payroll tax deferral is totally optional for private-sector employees. If you’re working in the federal service, this is going to be different. All employees who are working for the federal government will see the deferral of Social Security taxes on their income. This is mandatory for all federal employees and there is no way to wriggle out.
Uncollected Social Security tax
The deferred Social Security taxes will be collected over a five month period. This means when the uncollected payroll taxes begin to be collected by your employer, you will see less take-home pay. This isn’t going to be at a rate the double of 6.2% Social Security tax.
Here is an example of someone who earns $50,000 a year and opt to defer Social Security taxes.
Total Social Security taxes paid annually: $3,100
Social Security tax paid up until September 1, 2022: $2,325
The remaining $775 of Social Security tax will be deferred but will be collected from January 1, 2023 to April 30, the same year. That said, you will pay an extra $775 on top of what you’re obligated to pay during this five-month period.
Again, for an employee with annual income of $3,100, the Social Security tax obligated to be paid for five months is $1,291—added with the $775 deferred payroll tax from income, the total Social Security tax paid will be $2,066.
While the average payroll tax paid would be $258 without deferral taxes being added, the total Social Security tax paid will be $413. This is less take-home pay in total.
In a way, you can think of the payroll tax deferral from your income with the executive order as a loan you’re given with flexible payments. This program will surely help out millions of Americans who are continuing to work during the pandemic.