About a month ago, President Trump signed an executive order that expanded economic relief to taxpayers. Starting September 1, 2020 and through December 31, 2020 employees can defer payroll taxes. The order includes the 6.2% employee’s share of the Social Security taxes but excluded the 1.45% employee’s share of Medicare taxes. Simply put, all payroll taxes that you can see in your pay stub, except for the Medicare tax, can now be deferred through the end of the year. The deferral is applicable for those employees whose biweekly pre-tax compensation does not exceed $4,000, or the equivalent threshold amount with respect to other pay periods.
While I tend not think of this program as populism, I do think the new program may do more harm than good. Here are my thoughts on this tax deferral “relief”.
It is a Deferred Loan, Not a Relief
The IRS Notice 2020-65 calls the payroll deferral period a “Tax Holiday” but in fact it is not. The reason I call it the deferred loan is because you will have to repay all deferred payroll taxes before April 30, 2021, or interest, penalties, and additions to taxes will begin to accrue on May 1, 2021
The repayment of deferred taxes will resume on January 1, 2021 and will be reflected in your paycheck. This means, that your take home pay will be less starting January 1, 2021 if you decide to opt in. Therefore, you must be cautious and weigh all pros and cons.
It is a Voluntary Program
Even if you decide to opt in this program, the payroll tax deferral program is optional for employers. Many employers have already indicated that they won’t be participating in it due to changes that are needed to be made to their payroll systems and potential negative impact on the paycheck income and payroll tax obligations of employees in 2021.
Although this “relief” can indeed provide you with a little extra income through the end of 2020, I think that the positive effect will be barely-there. Chances are high that this extra income won’t make a dramatic difference in your current financial life. By opting in the program, you will reduce your income in 2021 when the repayment of deferred taxes begins. Since we have no idea what the future holds, especially with upcoming elections, potential changes in economic policies, and COVID-19 developments, I think you will be better off by not participating in this program.