Clarifying Tax Law Confusion

Last month, President Trump issued an executive order to provide employees relief from withholding taxes. The result is additional take-home pay for the employee. This article focuses on the mechanics and results of this order. I will also opine on the impact of such order to the solvency of the Social Security Benefit Program which, as stated in my previous article, remains marginally funded through 2035.

We all wish to create greater amounts of cash flow for our living expenses but at what price does this wish come true? For example, if you are currently employed, you are contributing to your future through a withholding program titled “Federal Insurance Contributions Act” abbreviated as FICA. Two components make up the FICA portion of your paycheck withholding. The first component is the Social Security Tax, also called the Old-Age, Survivors and Disability Insurance (OASDI) Tax, at a rate of 6.2% of your gross wages to a maximum wage limit of $137,700.

The second component of the FICA is the Medicare Tax at the rate of 1.45%. This tax is applied to all wages paid to an employee. Unlike the Social Security Tax, the Medicare Tax has no annual wage limit. These withheld funds are committed, by the U.S Government, to your future for purposes of assisting with lifestyle expense. 

The president’s order requires employers to discontinue withholding the 6.2% FICA from employees’ paychecks. However, the employer continues to be responsible for the matching funds at a rate of 6.2%. To further complicate the application of the order, employees with bi-weekly income of greater than $4,000 do not qualify for the deferral of the 6.2% Social Security Tax. Based on a weekly payroll of $2,000, employees earning less than $104,000 in annual wages will be eligible for the deferral and will take home more net pay.

As with any tax benefit, the applicable period for the deferral of Social Security Tax for eligible employees is September 1 through December 31, 2020. The desire of the Executive Branch of our government is to develop a law that will allow the deferred balance of Social Security Tax to be eliminated instead of repaid by the employee.

To remedy the confusion on which party, employer or employee, pays the deferred Social Security Tax, the IRS issued on August 28, 2020, Notice 2020-65. The notice directs employers to remit the deferred Social Security Taxes ratably over the period January 1, 2021 through April 30, 2021. Failure to remit the taxes deferred from 2020 will subject the employer to interest and penalties.

One could argue the additional cash flow required to pay both employee and employer shares of the Social Security Tax places a burden on the employer. What will be the tax deduction allowed the employer if both shares of the tax are paid by the employer? Tax policy would dictate the fairness of allowing the employer the deduction since the economic impact is actually borne by the employer. However, tax policy in the United States is not based on equality but rather revenue generation. Who knows what will happen until we receive additional guidance from the Treasury Department?

Until then, keep smiling, enjoy your extra cash and I’ll see you on the golf course! 

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