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Payroll Tax Holiday: To participate or not

By September 2, 2020September 18th, 2020No Comments

The ongoing COVID-19 pandemic has disrupted the status-quo in all areas of management and forced employers to make difficult decisions when it comes to how their organizations are run. A new executive order signed by President Trump on August 8 is the latest change that employers must navigate during the COVID-19 crisis.

The executive order allows employers to temporarily stop withholding employee payroll taxes between September and December 2020 in an effort to provide relief during the pandemic. But there’s a catch – workers will have to pay the taxes by the end of April 2021.

On August 28, the IRS issued guidance to employers explaining the logistics of the program.

What are payroll taxes?

  • Payroll taxes consist of Social Security and Medicare taxes
  • Each pay period, employees pay 6.2% of their pay to Social Security and 1.45% to Medicare.
  • Employers match the rates paid by employees for a total of 12.4% Social Security and 2.9% Medicare
  • The CARES Act of March 2020 enabled employers to postpone paying their share of the Social Security Tax until the end of the year, allowing them to pay back the sum during 2021 and 2022.

The proposed “tax holiday” only applies to those whose bi-weekly paychecks are less than $4,000, equal to $104,000 a year.

Tax deferral, not tax forgiveness

Employers are now faced with the decision to opt-in to the proposed “tax holiday.” And because the president doesn’t have the power to waive taxes, the executive order only postpones when they are due. This means that employees, and subsequently their employers, are still responsible for paying the withheld taxes in 2021.

Employers who choose to withhold during 2020 would then have to withhold twice as much beginning in January of 2021 in order for their employees to pay back what they owe.

Additionally, if an employer chooses to suspend withholding of an employee’s Social Security tax during 2020 and the employee departs at the end of the year, the employer remains liable for the employee’s share. In this case, the due date for the tax bill would be extended to 2022, according to the IRS.

In order to foot the bill, the employer can then “make repayment arrangements with the employee.” Otherwise, the employer would have to pay the balance owed.

Jonathan Barber, head of compensation and benefits policy research at Ayco, a Goldman Sachs company that provides financial counseling, told the Society for Human Resource Management that it’s not clear if employers would have to enforce collection on departed employees.

“Although the notice allows employers to make other arrangements to collect the deferred Social Security taxes from the employee other than through payroll, it is not clear just how far an employer could go to collect such amounts and what means.”

To participate or not?

The U.S. Chamber of Commerce and more than 30 trade associations wrote a letter to Congress and the Treasury Department saying deferring payroll taxes is unfair to employees who would eventually be left with the bill, and that many of their members will decline to participate.

“Many of our members consider it unfair to employees to make a decision that would force a big tax bill on them next year,” wrote the groups.

To demonstrate the magnitude of the eventual bill compared to the immediate benefit of deferral, the U.S. Chamber created an income impact analysis chart. While certain employees will see a small increase in paychecks, they will owe up to $2,232 in 2021.

Graph via: U.S. Chamber of Commerce

What now?

If employers decide to withhold the payroll tax, the guidance does not provide for allowing individuals to opt out.

Employers that participate must repay the deferred taxes to the IRS during the first four months of 2021, unless legislation is enacted to forgive the uncollected taxes.

“Employers will need to withhold the total taxes deferred by each employee ‘ratably’ over the four-month period,” Pete Isberg, vice president of government relations at HR and payroll services firm ADP, told SHRM. “Employees will notice reduced net pay in 2021 equal to any increase in net pay in 2020 if they defer the tax.”

There is no penalty for noncompliance if employers decide to continue withholding as usual.

About the Author

Lia Tabackman is a freelance journalist, copywriter, and social media strategist based in Richmond, Virginia. Her writing has appeared in the Washington Post, CBS 6 News, the Los Angeles Times, and Arlington Magazine, among others.


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