What is a payroll tax holiday? And more FAQs about the new executive order.

President Trump is deferring payroll taxes. What does that mean for individuals and employers? We answer some of the biggest questions you may have about the new policy.

On August 7, the White House announced that President Trump would sign an executive memorandum to suspend the collection of payroll taxes from September 1 until the end of 2020. The goal of this payroll tax holiday is to provide an infusion of cash into the economy. The IRS issued guidance on the payroll tax deferral on August 28.  Here are the answers to some of the top questions you may have about payroll taxes.

Note: We’ve updated this post to reflect guidance issued August 28.

Do employers have to stop withholding payroll taxes?

No. On August 28, the IRS issued guidance that makes it clear that employers may elect to stop withholding payroll taxes on wages paid September 1-December 31, 2020, but that these taxes are deferred, not forgiven, and that the taxes are postponed until the period beginning January 1, 2021, and ending April 30, 2021. If the taxes aren’t paid by May 1, 2021, interest and penalties will begin to accrue on these unpaid taxes. Employers who elect to forgo withholding payroll taxes now may end up doubling withholding starting January 1.

Who is affected by the payroll tax holiday?

If your biweekly salary is less than $4,000 and your employer opts into this program, you will not see payroll taxes withheld from your paycheck for the rest of the year. We don’t anticipate many, if any, employers opting into this program.  The executive memorandum doesn’t apply to those making $104,000 per year or more (more than $4,000 every other week).

How much more money will I see on my paycheck?

On every paycheck, you see a combined 7.65% of your wages withheld to fund programs like Social Security and Medicare. This deferral only covers the Social Security portion which is 6.2%.  For the rest of 2020, if your employer elects to defer the withholding, your paycheck will reflect this additional 6.2%, as it won’t be withheld.

Can I go ahead and spend that money? Or will the payroll taxes eventually need to be paid?

This is still unclear. Currently the deferred payroll taxes must be paid back beginning in January 2021, effectively doubling up on the 6.2% from January 1, 2021 until April 30, 2021.  President Trump has asserted that if he is reelected, he will permanently suspend payroll taxes, but experts are not in agreement as to whether this is possible. As it stands now, the Treasury Department has the authority to delay the payment of payroll taxes (which is why this is being called a “suspension”), but not to forgive them entirely.

Do employers get a break on payroll taxes, too?

No this is just the employee portion of Social Security tax.

What happens if the employee is no longer employed after December 31, 2020?

The employers remain liable to collect from employees even if they are no longer employed.  Employers are permitted to “make arrangements to otherwise collect” the total taxes due from the employee but there is no guidance on how an employer may do so.   

More questions? Reach out to us at info@sbfcpa.com so we can help you figure out what the payroll tax holiday means for you or your employees.

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