- The executive order on September 1 allows employees to defer social security withholding until 2021
- Federal employees are required to take part in this action
- For the rest who can choose: what does this mean?
The president’s executive order allowing employees to defer social security withholding on their payroll taxes has brought about an interesting question for non-federal employees. All federal employees have been instructed to take the deferral, though all other workers have the option to choose. What should you do? Here are the facts:
- This order affects social security only, not Medicare
- Social Security Tax is currently set at 6.2%. This will double when the payment deferral period is over, setting the projected tax rate for 2021 at 12.4%.
- It’s not a tax cut, it’s a deferral. This means employees will have to start paying back 2020 withholdings next year in addition to that of 2021
- The result? Decreased taxes for the rest of 2020, and a major increase starting in 2021.
Taxpayers taking the deferral are advised to save up their money now in preparation for the payback period. Consequently, the deferral may not boost economic activity as much as intended. Many employers have already opted out of the deferral option while others are leaving the decision up to the employees.
The Treasury is currently exploring possibilities to eliminate the double payback rate post-deferral, though this seems unlikely. If this happens, however, the deferred taxes will be lost to the Social Security Fund which is already at an all-time low and set to run out by 2034.
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Associate, Creative Solutions
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