Payroll taxes are a reality for every employee. Recently, during the COVID-19 pandemic, payroll taxes were suspended for certain workers. While this was helpful for some groups of people, not everyone benefited from this move.
Understanding what payroll tax is and what it means to certain employees is an important thing to learn about, especially if it affects you or your business. In this article, we will explore exactly what suspending payroll tax means.
What is Payroll Tax?
Payroll tax comes out of employees’ paychecks and goes toward government programs like Social Security and Medicare. In August 2020, former President Trump suspended payroll tax for workers making under $100,000 during the COVID-19 pandemic.
As a result, employees could opt out of paying payroll taxes from September to December 2020 to January to April 2021. Workers who were eligible for the tax suspension had to pay back their taxes by April 2021 and resume paying payroll taxes normally afterward.
If the taxes weren’t paid back on time, people faced penalties. Employers that don’t pay payroll taxes can end up having to pay double through the Trust Fund Recovery Penalty. Additionally, they must pay their original tax, plus the penalty that is equal to the amount of the tax. Interest is included.
What Does Suspending Payroll Tax Mean?
Suspending payroll tax simply means employees won’t have to pay for the Social Security and Medicare taxes that get taken out of their wages. This isn’t a tax cut, though, so they’ll eventually have to pay the taxes back.
This can mean a lot of things for different workers. While self-employed people and businesses profit from payroll tax suspensions, the unemployed, front-line workers and more suffer.
Self-employed workers already pay a significant portion of their income to taxes, so a tax suspension could benefit them. Businesses may save money thanks to the tax suspension. For example, Amazon reported paying around $2.4 billion in payroll taxes in 2019. As such, a payroll tax would likely work to its advantage.
As for the rest of the workforce, payroll tax suspension may not mean the same big savings. Unemployed people obviously won’t benefit from a tax suspension because they don’t pay payroll taxes. Unfortunately, the unemployed are the people who were hit hardest by the COVID-19 pandemic, and they won’t be the ones benefiting from this. People who are retired or disabled also will not gain any benefits from a tax suspension.
Front-line workers, while benefiting more than the unemployed, don’t stand to gain much from payroll tax suspensions. If you work 40 hours a week and make $15 an hour, the tax suspension will only save you about $180 per month. Social Security and Medicare will also obviously not gain anything during the suspension. This may also exacerbate existing financial problems within these government programs.
Bottom Line: Understanding the Implications of the Payroll Tax Suspension Matters
Overall, payroll tax suspension means certain people will benefit from not having to pay payroll taxes, while others may hit a roadblock. The COVID-19 tax suspension probably helped out workers who make under $100,000 a lot during the pandemic.
However, it’s important to remember that it is a tax suspension, not a cut, so everyone eventually had to pay their taxes back. On top of this, everyone must continue paying payroll taxes normally post-April 2021.
