Payroll Tax Holiday – Points To Consider

Last month, the President issued an Executive Memorandum directing the Secretary of the Treasury to defer the withholding, deposit, and payment of certain payroll tax obligations. On Aug. 28, the IRS issued guidance on this memorandum via Notice 2020-65, regarding the deferral of employee payroll tax obligations, which took effect Sept. 1, 2020.

Let’s take a look at how it works and the long-term implications.

What is the Payroll Tax Holiday and how does it work?

In a nutshell, the payroll tax “holiday” gives employers the option to defer a certain portion of an employee’s payroll tax (Social Security tax and the equivalent Railroad Retirement Tax, or RRTA). So, for those who qualify, your employer would have the option to defer 6.2% of your paycheck starting Sept. 1, through Dec. 31, 2020. For example, someone earning $65,000 per year is paid a gross amount of $2,500 biweekly. In this case, if the employer elects to defer your payroll tax, the employee’s biweekly pay would increase by about $155 from now until the end of the year.

Are all employees affected?

No. First, the notice applies to employers, rather than employees, as employers have the responsibility of withholding applicable taxes. Only employers that are required to withhold and pay the employee share of Social Security tax (and equivalent RRTA provisions) are designated as “affected taxpayers” under this Notice, and the employer is not required to participate in the deferral program. Additionally, the payroll tax deferral is available only to employees with wages and compensation of less than $4,000 for any biweekly payroll period, from Sept. 1 to Dec. 31. Employees with variable pay (such as commissions, overtime, or a bonus) could be eligible for deferral in one payroll period where they have less than $4,000 of pay, but not eligible in the next payroll period.

Are all employers required to participate in this deferral?

No. It appears that employers can choose whether to implement the deferral. It’s important for you to check with your employer to see if they are participating in this program. The Defense Finance and Accounting Service (DFAS) has announced that all servicemembers with a monthly rate of basic pay less than $8,666.66 will participate.

Do you have to pay back the tax, and how?

Yes. Keep in mind that this is only a deferral of tax. Participating employers will have to withhold and pay any deferred payroll taxes from employee wages beginning Jan. 1 through April 30, 2021, which means employees who had the tax deferred would see a lower take-home pay until the tax is repaid. Also, it’s not clear how employers would manage their repayment obligation for those employees who have since separated from the employer.

What should be your next steps?

• If you earn less than $104,000 per year, check with your employer to see if they are participating in the deferral program.
• If part of your payroll taxes will be deferred this year, be sure to plan your budget for when that money will be collected from your paycheck next year (January through April). This will result in a smaller than normal paycheck. For servicemembers, DFAS will provide additional information on the collection process.
• Consult with your tax advisor depending on your individual situation, and taxpayers can call the “Notice 2020-65 Hotline” at (202) 317-5436 (not a toll-free number).

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