President Trump issued an Executive Order creating a payroll tax holiday on Aug. 8, 2020. The holiday gives employers the ability to temporarily defer a portion of employee payroll taxes.
While the holiday was created as a way to provide individuals with financial relief, it’s also created some confusion for business owners and accountants. Here’s what we know about this deferral.
How does the payroll tax holiday work?
The payroll tax holiday allows businesses to not withhold employee Social Security taxes between Sept. 1 and Dec. 31, 2020, without incurring any penalties or fees. The deferred taxes are then due between Jan. 1 and April 21, 2021. Only employees with wages or compensation less than $2,000 on a weekly basis, $4,000 on a bi-weekly basis, or $8,666 monthly are eligible.
The IRS issued guidance on Aug. 28, 2020, to supplement the Executive Order. Despite this, there are still some unanswered questions. It’s unclear at this time how employers should go about collecting deferred taxes from their employees.
Who’s responsible for paying the deferred taxes?
As an employer, you’re responsible for the tax liability and timely repayment of the deferred taxes. If you can’t collect these funds from your employees, you’ll need to make other payment arrangements.
You’re also responsible for paying the deferred taxes if an employee is terminated.
Do I have to participate?
No. The IRS ruled this deferral is voluntary. Your business can opt in or out. Employees of the federal government must take part in the deferral and can’t opt out. However, the Senate, House of Representatives, and Supreme Court all have stated they don’t plan to participate.
Although this deferral would give employees a larger paycheck over the next few months, it also means those employees will have to pay more in taxes in early 2021. We recommend working with your payroll provider and tax professional to determine if this deferral is beneficial for your company and employees.
Have questions about this payroll tax holiday? Let’s talk!