There has been a lot of discussion recently about payroll taxes and the ways that they affect business owners.
The President recently announced executive action suspending payroll taxes through the end of the year in response to coronavirus and the shutdowns it led to. For businesses, this is one of the ways the government has stepped in to offer aid to struggling businesses.
It’s been much-needed relief, particularly as a lot of employers discovered their business interruption insurance policies had little coverage for a situation like a pandemic.
The following are some of the things employers should know about payroll taxes, particularly in the situation we’re in right now.
What Are Payroll Taxes?
Payroll taxes are paid to the federal government on wages, and the money is then primarily used to fund social insurance benefits, including Social Security and Medicare. Some of the federal income taxes also pay for security and defense.
Employers are required to report taxes on a quarterly basis in most cases, and to deposit their employment taxes.
Employment taxes are withholdings from employees’ checks. They cover not only federal income tax, but also in some cases, state and local tax and the employers’ Social Security and Medicare taxes (FICA). They also include the portion of FICA paid by the employer and federal and state unemployment taxes.
There are things that employers are required to do as it pertains to payroll taxes, including figuring withholdings, depositing employment taxes on a set schedule, and reporting quarterly about employment taxes.
If an employer doesn’t handle payroll taxes properly, they can be penalized.
In 2020, the Social Security tax rate is 6.2% on the first $137,700 of wages paid. The Medicare rate is 1.45% on the first 200,000 of wages, plus 0.9% on wages above $200,000.
Nine states don’t have an income tax on wages currently. These are Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. There isn’t a tax on wages in New Hampshire and Tennessee but there are taxes on interest and dividends in some situations. You can start your own business by getting an LLC in Florida.
There are voluntary payroll deductions that may be withheld from employee checks, too, only if the employee agrees. These can include 250K life insurance premiums, health insurance premiums, and retirement plan contributions.
Penalties
If you don’t pay payroll taxes or they’re late, then as an employer, you may face penalties, and there is going to be an accrual of interest.
As an employer, it’s your responsibility to ensure deposits are timely, the deposits are made in the right amount and that the deposit is made in the correct way. If you don’t do any of these, you may be subject to what’s called an FTD penalty, which stands for Failure to Deposit.
There is a penalty system that is four tiers if you make incorrect or late deposits.
The rate you have to pay is based on how many calendar days you are late.
There is a 2% rate for deposits that are 1 to 5 days late. Then it’s 5% for deposits that are 6 to 15 days late and 10% for deposits more than 15 days late.
There is a 10% rate for deposits not paid by EFT.
There’s a 15% rate for all amounts that are unpaid more than ten days after the date of the first notice requesting payment.
COVID-19 Changes
Under the CARES Act, passed in response to the pandemic in spring, there were measures intended to relieve some of the financial pressure on small businesses. For example, there was something called the Employee Retention Credit, and there was also a modification of net operating losses and a write-off for property improvements.
What Does The Payroll Tax Deferral Mean for Employers and Employees?
In August, the president announced he would be taking executive action regarding payroll taxes after Congressional negotiations failed to yield results.
When announcing the order, the president said it was a way to put money in the pockets of American workers and create incentives for employment and work.
Under the order, the employee’s obligation to pay a 6.2% Social Security tax per check is deferred. It applies to people who make less than $4,000 every two weeks, which would mean an annual salary of around $104,000.
The Treasury Department, under the order, has been instructed to see how the government might be able to forgive the deferral of the payments, but right now that’s not in place.
In 2018, the median household income was just over $63,000, according to the U.S. Census Bureau. If a worker made $64,000 before taxes, that would mean being paid on a biweekly basis would come out to around $2,400 before taxes. Then, based on a rate of 6.2%, the taxes for Social Security out of that check would be around $152.
That would mean a deferred amount of $1,220 from September through the end of the year. It would be similar to the amount that was sent out in stimulus checks earlier in the year.
Some are describing is at an interest-free government loan, however.
Unless something happens that changes the situation, businesses will still have the taxes due at the start of 2021.
It may be that employers don’t necessarily pass the deferrals to their employees, because they’ll be worried about how to get the money back when they eventually make their payments.
What this all means, at least for now, is that there’s a potential for workers to take home more money through the end of the year, but that’s not a certainty under the executive order.
There are concerns that the move doesn’t help the people who most need it either, since there are around 17 million Americans unemployed. The executive orders issued by the President did address unemployment payments, with a $400 bonus.
For employers, it’s important to understand the full implications of a payroll tax holiday, and also what they’ll do when the deferral period is over if there aren’t any changes that address it before then.