The economic impact of the coronavirus pandemic has already been huge, and has the potential to get even larger in the months and years to come. Lawmakers in Washington have scurried to find ways to try to cushion the blow for the American public, with legislation that will send one-time $1,200 stimulus checks to most adults.
Yet Congress drew the line at providing ongoing tax breaks to individual workers, choosing to forego a proposed payroll tax holiday. Instead, the federal government gave that tax break to businesses of all sizes. The resulting new law has given employers some financial flexibility for the rest of 2020 and beyond — but at least for now, it won’t give the same benefits to those companies’ employees.
The big break America’s businesses got
The recently passed Coronavirus Aid, Relief, and Economic Security Act included a wide range of provisions to help support the economy. One portion of the CARES Act addressed the obligations that employers have with respect to the payroll taxes they pay.
Employees are all too aware that their employers take money out of each paycheck to go toward Social Security and Medicare payroll taxes. In 2020, employees will pay 6.2% of their pay up to $137,700 to support Social Security, and an unlimited 1.45% tax on all of their earnings applies to go toward the Medicare program.
What many don’t know, though, is that employers are required to match those amounts with money of their own. That adds up to 7.65% of payroll for all but the highest-paid employees, adding considerable cost for employers.
It’s that employer portion of the payroll tax that the CARES Act addresses. Employers are still required to send what they withhold from their employees’ paychecks to the federal government on their current deadlines. However, they can put off paying their employer portion of those taxes that apply to payroll for the remainder of 2020. Of that amount, half will be due at the end of 2021. Employers will have to pay the second half by the end of 2022.
The impact on businesses — large and small
Most proponents of the measure pointed to the necessity of giving small businesses much-needed relief. The measure doesn’t forgive the payroll tax liability, but the deferral gives employers more liquidity now to help them make ends meet during the coronavirus pandemic and its aftermath.
However, the tax break doesn’t just extend to small businesses. There’s no size restriction to get the benefit. So while a small business with a few employees and $100,000 in payroll will potentially get an extra $7,650 to use for a year or two, a big business with thousands of employees and $1 billion in payroll would get $76.5 million.
Will companies really have to pay the money eventually?
Initially, some lawmakers had sought complete payroll tax forgiveness, letting both employees and employers no longer have to pay the taxes at all. That measure faced criticism, largely because it wouldn’t have helped those who lost their jobs and would parse out money only gradually rather than in a quick one-time payment. The result was the provision requiring repayment in 2021 and 2022.
However, some now believe that future stimulus proposals could take the next logical step of forgiving those tax amounts entirely. Again, that’d be useful for small businesses scrimping every dollar they can — but it would also potentially be a much larger benefit for the big companies that arguably don’t need the financial support as badly.
Some also fear that payroll tax forgiveness would weaken Social Security. If the federal government didn’t make up for the lost revenue to the Social Security Trust Funds by diverting money from the general budget, then it could move up the trust fund depletion date by years from its current 2035 projected date.
Keep your eyes on your taxes
Social Security remains a politically volatile issue. If big employers use these large payroll tax deferral savings to hire new workers, then it could be worth the cost to the government. If they simply pocket the savings, however, then it could draw further criticism from those who believe the CARES Act didn’t do enough for average Americans.