Have you heard of this year’s payroll tax holiday? Maybe as an employer, you have heard of it, but aren’t sure the best way to proceed. Allow me to outline what it is, and why you should be talking with your accounting professional about it.
What is the Social Security Payroll Tax Holiday?
In late August, as part of COVID-19 relief, the IRS issued a notice allowing employers to temporarily suspend withholding Social Security payroll taxes on eligible employees’ paychecks. The suspension applies only to employees whose wages are less than $4,000 for a biweekly pay period, including salaried workers earning less than $104,000 per year. The “holiday” is temporary, available from September 1 – December 31, 2020.
What does it mean for employees?
Remember, this is a temporary deferment. If an employer suspends collecting an employee’s Social Security payroll tax from September 1-December 31, 2020, the employer will need to collect additional amounts from paychecks from January 1 – April 30, 2021, to repay the obligation. If repayment is late, employers are subject to interest and penalties, which would begin to accrue on May 1, 2021.
However, if there is legislation enacted in the future (i.e., none exists right now) to forgive the uncollected taxes, employees would not need to repay what they deferred. As of this writing, there is no word as to how close the federal government is to passing such legislation.
Employers get to decide
Because the payroll tax holiday is not mandatory, employers are not obligated to participate. According to a report in Bloombergtax.com, on September 3, an IRS representative said that the tax holiday is optional for employers. The same representative also stated that employers, and not employees, control the choice of whether to implement deferral.
The representative went on to say if an employee wants the deferral, but the employer does not want to implement it, the employer is not obligated.
Two schools of thought
There are two schools of thought on whether to offer the tax holiday.
- Some find that because this is a deferment, and employees will have to pay back what they owe, it’s best not to offer it because it puts a large tax burden on employees in 2021.
- Others want to give their employees extra take-home funds now. While providing the opportunity for staff to take home more pay now, they must also make it clear that employees will have a larger 2021 tax obligation if forgiveness legislation does not pass.
Adjusting payroll systems
Bottom line: If you decide to offer the tax holiday, you will need to make major adjustments to how payroll is processed. It’s also recommended to have an agreement in place that obligates employees to pay back the funds if they take the holiday but then leave the company.
This is a situation with a lot of lingering questions. Let’s have a conversation about what is right for your company, and how to correctly set up payroll if you decide to proceed.