There are things to love or hate about the latest executive order of a payroll tax holiday, such as:
- Eligible employees love the extra cash in their pockets that would ordinarily go to the government to spend or to save. Though as it stands now, that extra cash would need to be repaid at the end of the period...
- Employers hate the headache of implementing a new operation to their payroll process and accounting.
If you don’t have any eligible employees (making less than $4,000 pre-tax per bi-weekly pay period) and you’re sure none of your eligible employees will choose to defer tax payments (extra cash) then, you have nothing to worry about.
If that’s not your situation, then you should know that there are still a few questions for the US Treasury about the details of this payroll tax holiday. More on that.
To help you prepare for whatever is ahead, we have put together a checklist to help businesses get ready to implement on the latest (August 8, 2020) executive memorandum on payroll tax deferrals.
Ready for a Payroll Tax Holiday?
Whether you love or hate this idea, there are still many unanswered questions for employers and employees on what the payroll holiday will mean for them. Perhaps the most important question is will these deferred taxes be forgiven? As of right now, and without further action by Congress or the President, it is likely that the employee’s deferred payroll taxes will need to be repaid. Although paychecks will be bigger in the meantime, eventually these deferred taxes will be paid by employees.
Let’s review what we know about the order and then get into what needs clarification.
What we already know about the order to defer payroll tax obligations
As of August 17, we know the following about the order titled “Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster.”
This order defers the withholding, deposit, and payment of the social security tax during the period of September 1, 2020, through December 31, 2020.
We know that the deferment has the following conditions:
(a) The deferral shall be made available with respect to any employee the amount of whose wages or compensation, as applicable, payable during any bi-weekly pay period generally is less than $4,000, calculated on a pre-tax basis, or the equivalent amount with respect to other pay periods.
(b) Amounts deferred pursuant to the implementation of this memorandum shall be deferred without any penalties, interest, additional amount, or addition to the tax.
The order instructed the Treasury to do the following:
Sec. 3. Authorizing Guidance. The Secretary of the Treasury shall issue guidance to implement this memorandum.
Sec. 4. Tax Forgiveness. The Secretary of the Treasury shall explore avenues, including legislation, to eliminate the obligation to pay the taxes deferred pursuant to the implementation of this memorandum.
How much will employees save by deferring payroll taxes?
What does the payroll tax holiday mean for an employee's taxes?
Deferring payroll tax, or taking the payroll tax holiday, means the amount you normally pay into Social Security will not be withheld from your paycheck through December 31, 2020.
In 2019, a wage earner’s Social Security tax rate is 6.2%. The Social Security wage base for 2019 is $132,900. That means the maximum amount of social security tax paid by the employer and by the employee each is $8,239.80.
How much could an employee see on payday by deferring payroll taxes?
The calculation varies depending on your rate of pay and pay frequency, but the Institute on Taxation and Economic Policy shared that a payroll tax holiday for those earning $24,200 or less annually would see an average tax change of $250 a month. The next highest income group ($24,300 to $43,400) would see an average of $610. Those making $43,400 to $69,800 would get a bump of $1,060 on average.
An eligible employee has to make $4,000 or less per pay period to qualify for the tax deferment and it is still not clear exactly how this eligibility will be determined if an employee has more than one job.
5 things you need to know about payroll tax deferral
Employers and employees need guidance from the Treasury on the latest payroll tax deferment for five main reasons.
- Eligible employees must opt-in, though it’s still unclear how this process will work.
- Opted-in employees (and employers) will need to know how much they will owe and when.
- Employers may not have to offer the payroll tax deferral.
- Employers who do will need to know what changes they need to make to their payroll payment procedures.
- Employers and employees expect curveballs.
Thankfully, the American Institute of Certified Public Accountants (AICPA) has sent a letter to David Kautter, Treasury’s assistant secretary for tax policy, and Charles Rettig, IRS commissioner with a list of questions on this most recent payroll tax deferment that need guidance.
In the meantime, there are things companies can do to prepare for changes to payroll affected by this payroll tax deferral.
Prepare Your Payroll
First and foremost, talk to your payroll provider. They will be your go-to resource for all things payroll change related!
The best thing a business can do when things look like they might change is to be as informed and ready as possible. Changes to payroll operations will need to be made and it will be important to know what your business is responsible for offering and accounting for.
Prepare Your Employees
A tax holiday sounds like something to love but being surprised by a big tax bill is no fun.
Prepare your employees with the following information:
- Who is eligible to defer their portion of the social security tax obligation.
- How they can opt-in to defer social security tax with your business.
- Where they can get up-to-date information on your company’s obligation regarding the payroll tax holiday.
- Alert your employees to the possibility that:
- They may not be eligible for the tax holiday if their total adjusted income for all wage work combined is higher than the $4,000 limit.
- An employee may be able to attribute the deferred amount toward 401(k) loan repayments, garnishments, and child support payments.
- Deferred payroll tax payments may be forgiven. Keyword there is may, as right now they are expected to be repaid.
Whether you love or hate what a payroll tax holiday means for your company, your paycheck, or social security, businesses can take steps to help their employees through these confusing times by communicating with them about what we already know and what could be happening to their paychecks in September.
As we learn more about how this executive action affects you and your business, we will continue to update this post—check back for more information. In the meantime, talk to your payroll provider for more information on how your business and employees are impacted.