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Making Sense of the Recent Tweaks to Payroll Taxes

There’s a measure of relief coming to some employees in the form of a short-term payroll tax break, but there are still plenty of questions of what’s the best way for small businesses to take advantage of these changes to help their workers without negatively impacting their own tax situation.

The Trump Administration recently issued a memorandum that would delay the withholding of Social Security taxes for some employees in an effort to support small businesses and workers across the country dealing with the economic crisis stemming from the COVID-19 pandemic.

The scale and volume of these tax policy tweaks can lead to some confusion for small businesses as they try to keep up with what’s going on and make informed decisions that are best for them, their employees and their bottom line.

The first thing to know is that the president’s memorandum only applies to the 6.2 percent Social Security withholding tax on employees, and not the responsibility for employers to pay on their own share of the 6.2 percent tax. And, despite some media reports suggesting otherwise, it also does not impact the Medicare insurance tax of 1.45 percent.

Here are some other things you should know about these temporary tweaks to the payroll tax:

  • Only employees who earn less than $104,000 annually qualify for the break.
  • It also does not apply to the parallel taxes on self-employment income.
  • This is not a forgiveness of an individual’s tax responsibility, but rather a temporary delay of their obligation to pay the 6.2 percent associated with Social Security from Sept. 1, 2020 through the end of the calendar year. Know that the Secretary of the Treasury can extend this delay at his discretion for up to a year.
  • Those who take advantage of the delay will not face any penalties or interest.
  • There is no relief with respect to the matching obligation of employers.
  • It appears that employers may be able to choose to continue withholding an amount equal to the deferred taxes. Additionally, there’s a lack of clarity on what employers should do for employees who initially take advantage of the tax delay in September, but then are no longer employed at that same business at the end of the year. This potentially could increase the tax liability for some employers.

Given the wide-reaching impact of this decision, it’s understandable for small business owners to be unsure of the best course of action to take. While we expect additional guidance coming from the U.S. Treasury, it’s never too early to get a head start on determining how your team will manage the implications of this significant tax policy move.

Reach out to one of our trusted tax advisors today, and let us help you navigate what is increasingly becoming a confusing and ever-changing economic landscape for small businesses.

We encourage you to contact us with any questions.

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