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Payroll Tax Deferral: What It Is And How It Affects Your Paycheck

Erin Gobler3-minute read
December 11, 2021

During the pandemic, the federal government enacted several policies to help reduce financial hardship on Americans. One of those policies was the payroll tax deferral, which temporarily reduced workers’ payroll tax burden to keep more money in their pockets.

While this payroll tax deferral may have provided temporary tax relief for American workers, it came with some caveats, including the requirement that those taxes eventually be repaid.

Keep reading to learn more about the payroll tax deferral, how it affected American workers and businesses, and what it means for your paychecks.

What Is Payroll Tax Deferral?

The Payroll Tax Deferral is a temporary pause on paying the Social Security tax, which is usually automatically withheld from your pay.

First, the Coronavirus, Aid, Relief, and Economic Security (CARES) Act gave companies the ability to defer payments of the employer’s share of the Social Security tax for the remainder of 2020. Then, in August 2020, President Donald Trump signed an executive order to place a temporary pause on the employee’s share of the tax, to last from September 1 through December 31, 2020.

While these deferrals may have offered some employers and employees a momentary financial reprieve, this is only a deferral – more like a loan – and the IRS required that it was eventually paid back.

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Eligibility Requirements For Payroll Tax Deferral

Whether you were eligible for the payroll tax deferral depended on two factors: how much money you made biweekly and whether your employer chose to participate in the tax deferral.

First, the payroll tax deferral was optional for employers. Many large employers and government entities chose not to participate because of the requirement that those taxes be paid back early the following year.

Even if your employer did participate, the tax deferral was only available to employees with biweekly paychecks less than $4,000. For quick math, that’s an annual salary of less than $104,000. If your biweekly paycheck was more than $4,000, you weren’t eligible for the tax deferral.

Keep in mind that bonuses and overtime pay also affected eligibility for the deferral. For example, let’s say your biweekly pay was normally $3,000. You would have been eligible for the tax deferral. However, if you worked enough overtime each week to earn more than $1,000 above and beyond your normal pay, then you wouldn’t have been eligible.

For the deferral of the employer share of payroll taxes that was signed into law in March 2020, eligibility was much broader. The law allowed all employers, including government entities, to defer the deposit and payment of their share of the Social Security tax.

When Do Deferred Payroll Taxes Need To Be Paid Back?

For employees who had payroll taxes deferred from September 1 – December 31, 2020, repayment was required to begin January 1, 2021.

It was originally planned that repayment would be complete by April 30, 2021, though the IRS changed its guidelines to allow for repayment through December 31, 2021. Because December 31 is a holiday, the IRS actually allowed for on-time payments up until January 3, 2022.

Employers were required to send the deferred payroll taxes to the IRS as they collected them, with the risk of interest and penalties if they didn’t.

For the employer’s share of the deferred Social Security tax, even more time was given for repayment. The IRS required that employers pay at least 50% of the deferred payroll taxes by December 31, 2021. The remaining 50% isn’t due until December 31, 2022.

Other Forms Of Financial Assistance

The payroll tax deferral was just one of the many forms of financial assistance put into place during the pandemic. Below are a few other examples.

COVID-19 stimulus checks

Throughout the pandemic, the federal government issued three rounds of economic impact payments to eligible Americans. Individuals received $1,200 in March 2020, $600 in December 2020, and an additional $1,400 in March 2021. These payments provided direct relief to households with incomes under a certain AGI threshold.

Expanded unemployment benefits

To address the large number of taxpayers who were laid off as a result of the COVID-19 pandemic, the federal government increased the weekly amount that unemployed workers could receive and extended the period of time for which they could receive benefits.

Student loan forbearance

In March 2020, the federal government placed all federal student loans into automatic forbearance and temporarily reduced interest rates to 0%. While it was initially only expected to last a few months, the suspension on payments was extended through January 31, 2022.

Foreclosure and eviction moratorium

To protect homeowners and renters, the federal government suspended foreclosures and evictions on certain properties. The foreclosure moratorium applied only to homeowners with loans backed by the federal government. There was also a moratorium on evictions for nonpayment of rent.

Advanced child tax credit

The American Rescue Plan Act of 2021 increased the size of the Child Tax Credit (CTC) and allowed parents to receive advance payments throughout the year, rather than simply receiving the entire credit with their tax refunds. This expansion applied to 2021 only.

Discounted broadband

During the pandemic, the Federal Communications Commission’s Emergency Broadband Benefit Program provided temporary discounts on monthly broadband internet bills for low-income households. Discounts were $50 per month for most eligible recipients and $75 per month for households on tribal lands.

Payroll Tax Deferral FAQs

It’s important to understand exactly how payroll tax deferral can affect you. Below are some frequently asked questions about the recent tax deferral that can help you make sure you understand the implications and are on the right track with your finances.

How much money is deferred?

The payroll tax deferral allowed companies to defer both the employer and employee’s share of the Social Security tax. The total Social Security tax is 12.4% of a worker’s pay, with 6.2% being paid each by the employer and the employee.

As a worker, you don’t see the share of the tax that your employer pays. It simply happens behind the scenes. But if your share of the tax was deferred, you would have seen a direct impact on your paychecks. The exact amount that was deferred would have been 6.2% of your pay up to $137,700. So for someone with a monthly income of $5,000, as much as $310 per month – or $1,240 total for the deferment period – could have been deferred.

Can I choose not to defer my payroll taxes?

In general, it was up to employers to decide if they would defer their employees’ payroll taxes. Some employers chose to do so, but many larger companies chose not to defer taxes. If your employer chose to defer payroll taxes, it’s up to them as to whether you can opt-out.

The federal government didn’t offer specific guidelines on whether individual employees could opt-out. While some companies may have given their workers this option, there was no requirement that they do so.

How do I know if my money was deferred?

The easiest way to know if your Social Security tax payments were deferred is to look at one of your check stubs from September 1 through December 31, 2020. There is usually a line item on the check stub for the Social Security tax. If this line item is normally on your check stubs but isn’t during those months, then it’s possible your company deferred your taxes. You can also speak with your company’s human resources or payroll department to ask if payroll taxes were deferred.

How do I pay that money back?

If payroll taxes were deferred from your paychecks from September 1 through December 31, 2020, then you would have had to pay that money back. Employers were instructed to withhold the deferred payroll taxes from employees’ paychecks throughout 2021. If your payroll taxes were deferred and taken out of your 2021 pay, then your paychecks during 2021 reflect the deferred taxes in your withholdings.

What should I do if my payroll tax is deferred?

The best way to prepare for the repayment of your deferred payroll taxes would have been to save the extra money you received on your paychecks instead of spending it. Then, when your employer increased your Social Security tax withholdings to cover the repayment, you would have money in the bank to supplement your reduced income until the deferred taxes were fully repaid.

The Bottom Line: Eligible Employees Will Need To Pay Back Deferred Funds

The payroll tax deferral was one of the many financial assistance programs put into place to help American workers during the pandemic. And while this tax deferral reduced peoples’ tax burdens temporarily, the federal government required that the money eventually be paid back.

To learn more about financial assistance available during the pandemic, visit our COVID-19 Resource Guide for more information on financial assistance and resources.

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Erin Gobler

Erin Gobler is a freelance personal finance expert and writer who has been publishing content online for nearly a decade. She specializes in financial topics like mortgages, investing, and credit cards. Erin's work has appeared in publications like Fox Business, NextAdvisor, Credit Karma, and more.