Payroll Tax Deferral: What It Is And How It May Affect Your Paycheck

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.

The CARES Act Payroll Tax Deferral: What It Was And How It Worked

The U.S. government enacted the payroll tax deferral to help employers, including self-employed people, keep more money in their bank accounts during the COVID-19 pandemic. This temporary pause on paying the employer portion of Social Security taxes, usually withheld automatically from your pay, went into effect in 2020. At this point, the program has ended.

First, in March 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act allowed companies to defer payments of the employer’s share of the Social Security tax through the end of 2020. Then, in August 2020, former President Donald Trump signed an executive order to temporarily pause the employee’s share of the tax, to last from September 1 through December 1, 2020.

While these deferrals offered some employers and employees a momentary financial reprieve, they are only deferrals – similar to a loan – and the IRS required that they be paid back in 2022 and 2023.

Who Was Eligible 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.

The payroll tax deferral was optional for employers, and many large employers and government entities chose not to participate because of the requirement that those taxes be repaid.

Even if your employer participated, the payroll tax deferral was only available to employees with biweekly paychecks of less than $4,000, which is an annual salary of less than $104,000. You weren't eligible for the tax deferral if your biweekly paychecks were more than $4,000.

But, bonuses and overtime pay also affected eligibility for the tax deferral. For example, let’s say your biweekly wages were usually $3,000. You would have been eligible for the tax deferral. However, you wouldn't have been eligible if you worked enough overtime each week to earn more than $1,000 beyond your normal pay.

For the deferral of the employer’s portion 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.

Employers Weren’t Required To Participate In Payroll Tax Deferral

Employers were given the option to choose whether to implement the deferral, and many decided against it to avoid the complexities of temporarily deferring payroll taxes and the need to collect and repay the deferral amounts later. Additionally, uncertainty about the program's long-term implications and the possibility of future changes in tax regulations influenced some employers' decisions not to participate.

Small businesses often found it easier to implement the tax deferral. Additionally, industries with a higher proportion of hourly or lower-wage workers were more inclined to participate, as the temporary increase in take-home pay was perceived as a benefit for employees facing financial hardship during the pandemic.

How Participating Employers Repaid Deferred Payroll Taxes

Employers that participated in the deferred payroll tax program had to repay the deferred Social Security taxes in two installments. The first 50% was due by December 31, 2021, and the remaining 50% was due by December 31, 2022. Employers needed to ensure they met the repayment deadlines to avoid failure to deposit penalties or interest.

What’s Happening With Payroll Tax Deferral Now?

The payroll tax deferral program concluded, and participating employers were required to complete repayment of the deferred amount according to the established schedule. The program was designed to be temporary relief during the beginning of the pandemic.

CARES Act Payroll Tax Deferral FAQs

Read on to hear answers to common questions about the CARES Act Payroll Tax Deferral program.

How do I know if my business had payroll taxes deferred?

If your business had payroll taxes deferred, you should have received a notification from your payroll provider or an update to your payroll reports indicating the deferred amounts. Additionally, you can review your company's payroll records and financial statements to see if there were any changes related to the deferral of payroll taxes.

How would I know if my business had to pay money back?

To determine if your business owes money for deferred payroll taxes, review payroll records for the deferral period in 2020. Then, check that deferred taxes were repaid in 2021 and 2022. You can also consult your payroll provider, tax professional, or check IRS communications for guidance and stay informed about any updates in tax regulations.

The Bottom Line: The Payroll Tax Deferral Has Ended

During the pandemic, the U.S. federal government implemented the payroll tax deferral to alleviate financial strain on Americans and boost the economy. The measure aimed to provide immediate relief by reducing the payroll tax burden, allowing people to retain more money, but this money needed to be repaid. 

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