Payroll tax relief refers to the temporary reduction or deferral of payroll taxes. This measure is taken to alleviate the financial strains on businesses and taxpayers in times of financial hardship. In 2020, payroll tax relief was in response to the impact of the coronavirus pandemic on income, work availability, and unforeseen expenses.

The CARES Act 

Congress passed the Coronavirus Aid, Relief and Economic Security (CARES) Act in March of 2020 in order to provide relief to those struggling financially during the height of the coronavirus pandemic. Around the same time, Congress also passed the Families First Coronavirus Response Act (FFCRA), which requires certain employers to provide their employees with paid sick leave or expanded family and medical leave for reasons related to the coronavirus. 

The CARES Act included relief through stimulus payments, tax relief, expanded tax return deductions, child care credits, extended sick leave, and more. In addition, in August of 2020, President Trump signed an executive order to the same effect regarding payroll taxes. Some of these changes can impact your federal and state tax returns.

Employee Retention Credit 

The Employee Retention Credit is a part of the CARES Act that aims to encourage businesses to keep their employees during difficult economic periods. It involves a refundable tax credit equivalent to half of the qualified wages an employer pays its employees between March 12, 2020, and January 1, 2021. 

What Are Payroll Taxes?

Payroll taxes are taxes paid on the wages and salaries of employees. Typically when you receive a paycheck you may notice deductions from your wages. These are social insurance taxes paid by every employer and employee to the government. In total, these taxes make up almost a quarter of the combined federal, state, and local government revenue. That makes the payroll tax the second largest source of government revenue in the United States. The largest source is the federal income tax.

FICA Taxes on Your Paycheck

Payroll taxes appear on your paycheck, and the largest contribution you make shows up under the letters FICA and MEDFICA. These stand for Federal Insurance Contributions Act and Medicare Federal Insurance Contributions Act. The first is a 12.4% deduction to fund Social Security, and the latter is a 2.9% deduction to fund Medicare. Combined, that comes to 15.3% of your wages. However, if you make more than a certain amount, you will only be taxed on what’s known as the Social Security Wage Base (SSWB), the maximum threshold of your earnings that the social security tax may be imposed on.

Half of the payroll taxes (7.65%) are paid directly by employers, while the other 7.65% are taken out of workers’ paychecks. While this seems equitable, studies have shown that employees actually end up paying more than their half when you consider that employees can lower wages based on their whim. This places a greater burden on employees.

Payroll Tax Relief

When the payroll tax relief was enacted by Congress in March 2020, it was intended to provide relief to eligible employers paying their employees. However, this act also applies to individuals who are self-employed. This tax relief took the form of the option to defer payment of a portion of an employer’s payroll taxes. 

Payroll Tax Relief for Self-Employed Individuals

Because the tax is split between employer and employee, self-employed people are able to defer the employer portion of Social Security or FICA payroll tax payments from March 2020 forward to a later date. It is important to note that this does not apply to the employee portion of the Social Security tax OR either portion of the Medicare tax (MEDFICA). These must still be paid according to their normal schedule. 

What Does the Deferral of Payroll Tax Mean?

Deferral refers to a temporary postponement of payment. It does not mean non-payment altogether or that taxes are entirely forgiven. This is important because the taxes must be paid at a later date. The deferral is meant to provide a small amount of relief to employers and self-employed workers in real-time during the height of the pandemic in 2020. During this period, employees making less than $4000 every two weeks would see an increase of 6.2% in their wages. This is only if their employer has opted into the tax deferral. That means after the return period, when repayment is due, employees should expect to see a decrease in their wages until the tax is repaid.

What is the Deferral Period?

The deadline and the amount for repayment of the deferred payroll taxes depend on how much you deferred. The applicable dates are the end of years 2021 and 2022. For instance, if you deferred the whole amount you were eligible to, then half of that amount is due by December 31, 2021. The second half is due one year later, December 31, 2022. 

If you opted to defer less than the full amount available, the process is slightly different. The first payment only has to cover half of the total eligible deferral amount, meaning the amount you were eligible for, regardless of what you actually deferred. The amount you did pay would apply toward this sum. If your paid amount was more than your deferred amount, you may not owe anything until December 2022.

Impact on Your Tax Return and Refund

How does payroll tax relief impact your income tax return? If you are not self-employed, your wages will automatically be adjusted by your employer in order to pay back any deferred taxes. If you are self-employed, you are not required to defer your payroll taxes, but if you opted to, you must report this deferral on your tax return. 

Expert Assistance from IRS Tax Relief Network

There are a number of resources to help you navigate the different COVID-19 relief programs that you might be eligible for, as well as how to follow up when it comes to your taxes. IRS Tax Relief Network can provide you with information, tax advice, and tools to help you understand how to get more money in your pocket in this time of need. 

Anything involving taxes can be stressful, and you want to make sure to maximize your net earnings. Our licensed professionals are experienced in resolving all of your tax needs, and with a simple three-step process can get you on your way to results. With over 30 years of experience, we handle just about every problem brought about by the Internal Revenue Service (IRS), including repaying your deferred payroll taxes.