Not everyone who works looks at the itemized breakdown of taxes and withholdings on their paychecks. Many will likely notice when their weekly payment amount increases or decreases, though. Workers in Texas might wonder why their paychecks appeared to reflect a raise on September 1. A “payroll tax holiday” was the source of the increase.
Taxpayers need to be aware of a critical fact regarding the tax holiday. The government is not forgiving the tax. Rather, a tax collection deferral will take place. The deferral started on September 1 and ends on December 31. Between January 1 and April 30, 2021, employers will become responsible for collecting the deferred taxes. Therefore, individuals will find that their paychecks are smaller in 2021 as the IRS expects repayment on the deferral.
That said, Congress and the White House could forgive the debt, making the reduction a retroactive tax cut. Current law does not reflect a tax cut, and taxpayers should not expect any guarantees of any forgiveness.
Some workers may appreciate the increase in take-home pay. The added funds increase purchasing power, which could resonate through the economy. However, the situation represents a short-term change to the status quo.
Payroll taxes refer to taxes that are directed towards future Social Security benefits. Hence, concerns arise about deficits in the Social Security Administration’s coffers. Another concern arises. What happens when someone quits or changes jobs before December 31? Employers could not collect deferred taxes on a 2021 paycheck if an employee leaves. No official word appears to exist on how the deferral will end up being reconciled in such a situation.
Employers will probably have more questions about this tax law change than workers, at least at first. Persons with questions about tax law, rules and compliance may wish to speak to a tax attorney.
