Payroll Tax | What it means for your small business

 

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 for months of 2020 and then, in turn, begin
collection of those deferred tax amount from January 1st to April 30th
of 2021.

Eligible employees include any employee whose pretax wages
and compensation during any biweekly pay period is 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 falls outside of the
classification of wages and compensation for Sections 3121 (a) or 3231 (e)
aren’t included in 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.

For example,

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 amount 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.

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