What is a Payroll Tax Cut?

In 2020, the federal government issued payroll tax cuts amid the COVID-19 pandemic. The tax cuts are in place to essentially increase the wages of everyday workers at the expense of Social Security and Medicare beneficiaries. Unlike income taxes that go to the U.S. Treasury, Social Security and Medicare taxes go directly to the federal government to be distributed to beneficiaries.

In this article, we will explore what the payroll tax cut is and what it means for employees’ wages.

What is a Payroll Tax Cut?

Essentially, payroll tax cuts decrease the amount of taxes taken out of employees’ wages. Workers will not receive a separate check with their savings; instead, they will see an increase in their paycheck amounts.

Social Security and Medicare taxes take a total of about 14.4% of workers’ paychecks. That cost is split evenly between the employers and employees, according to an article published in U.S. News.

In other words, normally, an employee’s paycheck is taxed by around 7.2% of the wages, salaries or the tips they claim, while their employers pay the rest.

With the tax cut, however, the employee’s portion of the taxes will be paid by employers and employees will pay their portion of the taxes at the end of the year. Originally, employees were scheduled to pay the taxes back in April, but this has been extended to December.

What Does the Payroll Tax Cut Mean for Employees?

As Zack Friedman of Forbes News put it, “The payroll tax ‘cut’ is effectively a deferral, which is paid back during the first four months of 2021.” In other words, employees will still have to see that they account for these tax cuts and see that they pay what they owe.

That said, there will not be any interest or late fees attached to the amount employees will have to pay back. The taxes will be collected in the same manner they would have been collected otherwise. 

What Kind of Employee does the Payroll Tax Cut Apply to?

The payroll tax cut does not apply to every employee. Employees who make over $104,000 a year do not qualify for the tax cuts. Additionally, employers have the option to not give their employees tax cuts. So, the tax cuts only apply to employees who work for employers that decide to allow it. Payroll tax cuts also do not apply to citizens who are unemployed or retired.

Bottom Line: Understanding the Payroll Tax Cut Will Help You Better Serve Your Employees

Now that you understand better what the payroll tax cut entails, you can help your employees navigate the more perplexing details of taxes and enjoy their hard-earned money. For more information, you can always visit the official website of the Internal Revenue Service. You will also be able to find the latest updates concerning taxes there.