Effective Sept 1st through December 31st, President Trump in a presidential executive order deferred the payroll tax. The order allows for employers to defer withholding on affected employees’ compensation during the last months of 2020 and then, in turn, begin a collection of those deferred tax amounts from January 1st to April 30th of 2021.
Eligible employees include any employee whose pretax wages and compensation during any biweekly pay period are generally less than $4,000. The order defines the wages as follows:
Wages as defined in [Sec.] 3121(a) or compensation as defined in [Sec.] 3231(e) paid to an employee on a pay date during the period that begins Sept. 1st and ends on December 31st, 2020, but only if the amount of such wages or compensation paid for a bi-weekly pay period is less than the threshold amount of $4,000, or the equivalent threshold amount with respect to other pay periods.
Of course, any wages that fall outside of the classification of wages and compensation for Sections 3121 (a) or 3231 (e) aren’t included in the determination of wages that are applicable.
A key thing to consider is that this is pay period dependent. Meaning that only pay periods in which the compensation is under the threshold may be excluded from withholding.
John Smith Employee | Pay periods
Sept 18th Gross $3,892.00 excluded
Oct 2nd Gross $4,010.00 not excluded
Oct 16th Gross $3,989.00 excluded
The key is the number of earnings in the bi-weekly pay period, meaning each pay-period must be treated independently.
There is some concern for some employees that the repayment period in January through April of 2021 could cause financial hardship if they are living “paycheck to paycheck”. The key to remember is that it OPTIONAL, you are not required as a business to participate.
A key date in the program is also May 1st, 2021 at which point any unpaid deferred payroll taxes are open to interest, penalties, and additions, as accrued.
If you have any further questions on this, as always, reach out to SWVA Tax & Accounting for advice. We are glad to help our business owners understand these situations and answer any questions you may have.