The payroll tax deferral could initially give employees more money in their paychecks, but it comes with a cost. Here’s what you and they need to know.
When is the payroll tax holiday?
The holiday will start on September 1, and run through December 31, 2020.
Read more about its detail on the IRS website, “Guidance issued to implement Presidential Memorandum deferring certain employee Social Security tax withholding.”
What is a payroll tax holiday?
Payroll tax aids the Federal government in paying for programs like Medicare and Social Security. In this case, it specifically addresses the Social Security tax, a 12.4% deduction, which is withdrawn fifty percent from employees’ paychecks and is paid fifty percent by employers.
During the holiday period, employers and employees would be exempt from paying the tax, which would slightly increase employees’ take-home pay.
An employee’s paystub shows the Social Security amount withheld, which is 6.2% of the gross amount. Employers pay the other 6.2% on their taxes.
Mary makes $1000 (gross) every two weeks. Pre-holiday Social Security would be $62 (6.2%) and be deducted for that time period. During the tax holiday, the $62 would be included in her net income.
But, the exemption doesn’t mean the money is free and clear. It is a pause, or deferral, in collecting the tax contribution.
Who is eligible?
To be eligible, an employee must earn $4,000 or less every two weeks (a maximum of $100,000 annually) and be employed during the tax holiday. Those who earn more than that are ineligible to participate in the tax holiday. It is unsure how this might impact contractors and the self-employed, who often pay their Social Security taxes with their income taxes.
How will employees pay it back?
If the Federal government decides to “forgive” the deduction, there’s no need to repay the tax.
However, if it is not forgiven, there are four plausible pay-back scenarios for employees, such as:
- Employees repay it on individual 2020 income tax return;
- Employees request that employers continue to deduct the tax from their paycheck;
- Employers withdraw the full amount from employees’ final 2020 paychecks—causing a bit of sticker shock; or
- Employers continue to withhold the amount until it’s due, meaning the employee would see no difference in their paycheck during the payroll tax holiday.
How will employers pay it back?
In the likelihood that the tax is forgiven, employers would not have to repay the amount. However, it’s more likely that one of these two scenarios will take place. Employers would:
- Withhold the amount from employees, putting the funds into an escrow account to accrue interest. Then apply that amount toward the full 12.4% payment.
- Pay a large tax bill in 2021 making up the difference.
The Final Word
State laws also have an impact on how this could be handled. Plus, what happens if a person leaves his job during the holiday? Finally, what if an employee has two jobs, but makes less than $4,000 every two weeks at each, but annually makes more than $100,000?
There is still so much to be sorted out. We’ll keep you informed as we learn more.
If you need it, we can assist you with the payroll process. Give us a call.