Payroll Tax “Holiday” or Not?

In August of 2020, President Trump signed a presidential memorandum referred to as Notice 2020-65, or the payroll tax “holiday,” that allows employers the option to defer the employee portion of the social security tax (6.2%) from employee paychecks for the period of September 1, 2020 through December 31, 2020.  The memorandum is different and should not be confused with the initial payroll tax deferral under the CARES Act.

Under the memorandum any deferred tax under the Notice 2020-65, has a requirement to be paid between January 1, 2021 through April 30, 2021.  Employers that fail to pay outstanding amounts will be held liable for taxes, penalties, and interest.

What to note:

a).  The payroll tax suspension only applies to employee wages of less than $4,000 per bi- weekly pay period, including salaried employees with annual earnings of less than $104,000.

b).  Employers that suspend collection of the tax from employees will collect additional taxes to cover the tax obligations from paychecks between January 1, 2021 and April 30, 2021.

c).  If an employee separates employment prior to any deferred tax being paid in full, the employer is responsible for repayment, or will be held liable.

Employees:

While some employees may find the “holiday” tax deferral handy in achieving current financial obligations, others may find its future obligations unmanageable.  Although the “holiday” tax deferral may be seen as advantageous for some, the mere fact that the employee will pay double social security tax in the first quarter of 2021 may seem unpalatable for many.

Employers:

Employers should be equally as nervous.  The memorandum requires employers to pay the deferred “holiday” tax obligation of employees that separate employment prior to full repayment.  This obligation can leave the employer left to hold the payroll tax “holiday” goodie bag.

The Bottom Line:  It is important to realize that the memorandum does not remove the tax liability for the employee, it only defers it.  Employees need to determine if they are financially prepared to be double taxed in the upcoming year, while employers must review turnover reports to identify any future financial liability and prepare for additional short-term processing headaches.

To assess if deferring the tax is right for your business, it is always wise to contact your tax professional and/or payroll professional or payroll service provider.