Confused about Payroll Tax Suspension? You’re Not Alone

Employers and employees alike have questions about the new so-called “payroll tax holiday.” Here are the answers you need to decide how this might work and what your next step should be.

Late last month the U.S. Department of Treasury and Internal Revenue Service issued guidance implementing the Presidential Memorandum allowing employers to defer withholding and payment of employees’ portion of the Social Security tax if the employee’s wages are less than $4,000 during a bi-weekly pay period. However, according to one source, many employers hesitate to implement this program because workers would need to repay deferred taxes in 2021; and this could create a hardship for many individuals.

If you have questions, there are payroll systems and business consultants that can help. In the meantime, here are a few details that may be useful:

• Employees would need to repay these deferred taxes during the first four months of 2021 unless legislation is enacted to forgive this obligation. However, your employees may not realize this.
• The payroll tax holiday isn’t mandatory, so it’s possible for employers not to participate. There don’t appear to be any penalties for nonparticipation, though this could change. If an employer does participate and doesn’t pay the deferred payroll tax to the IRS by April 30, 2021, the organization could be subject to penalties and late fees.
• Employers need to weigh the risks with the benefits and inform employees what they ultimately decide to do and what implications this will have on their paychecks. It is essential for workers to understand that this is not a permanent cut and that it will have to be paid back later.
• Organizations employing a payroll firm should find out how the tax holiday will work and what notices employees will receive.
• Guidance from the IRS is unclear regarding whether employers need to comply if an employee asks them to forego withholding these taxes.
• The deferral itself only goes through December of this year, but the taxes are not retroactive. If you implement the tax holiday is October, you can’t make adjustments to September payroll.

Click here for guidance from the IRS about this tax deferment or here for details about other coronavirus-related tax relief.