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Trump administration’s payroll tax deferral plan takes effect starting today

Beware that employers can take applicable tax payments out of an employee’s paycheck down the road

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A good news/bad news story for taxpayers from the Internal Revenue Service (IRS) came Tuesday, the first day of President Trump’s payroll tax deferral.

The good news is that American workers who signed up and took part in the program will see a temporary bump up in their take-home pay. 

The bad news is that they’ll probably see smaller paychecks in early 2021.

Who’s affected?

Under the order, affected workers would be:

  • Employees who will be compensated for any work between September 1, 2020 and December 31, 2020; and 

  • Employees whose pretax, bi-weekly paycheck is less than $4,000.

Those workers have an obligation to pay a 6.2 percent Social Security tax on each paycheck, with their employers picking up the responsibility for a separate 6.2 percent. Both workers and employers will also split a 2.9 percent tax to support the Medicare program. 

Get ready for the rollercoaster

Experts had previously criticized the deferral as being vague, but there are some salient points every applicable taxpayer needs to know because this deferral could also be called a rollercoaster ride.

Until the end of the year, employees who take part in the deferral can count on an interim boost in their take-home pay, but they may be shocked come January when they see that bump headed the other way. 

The simple reason is that employers have to start paying the payroll tax effective January 1, 2021. Those employers have until April 30, 2021 to pay the “applicable taxes” or interest and penalties will begin to pile on. 

And that might create a sticky wicket that taxpayers may not like. According to the order, to fulfill the obligatory taxes, the employer “may make arrangements to otherwise collect the total Applicable Taxes from the employee.” 

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