Payroll Tax Holiday: Gift or Grief?

payroll tax decisions

What is the payroll tax holiday?

In early August, President Trump issued an executive order allowing a payroll tax holiday for employees’ portion of the social security tax. The effective date of the order was September 1, 2020.

What are my options as an employer or as an employee?

Option 1: Employers can opt-out of the employee tax deferral plan.

Option 2: Employer offers the payroll tax holiday to employees.

Details:

  • The tax deferral program is available to employees whose bi-weekly salary is less than $4000.
  • Employees can defer their portion of the social security tax (6.2% of gross wages) for the period between September 1, 2020 and December 31, 2020.
  • The deferred tax – along with the current tax – will be paid back over the period between January 1, 2021 and April 30, 2021.
  • Penalties and interest will begin to accrue on unpaid deferrals beginning May 1, 2021.

Not all payroll providers are able to accommodate
this deferral plan. Before deciding, double check with your processor.

What are the risks?

For the employee, a higher tax liability in the new year. An employee who saves $124 per paycheck now, will (at a minimum) owe $248 per paycheck for the first four months of the new year.

For the employer, liability exists for the deferred taxes even if the employee no longer works for the company. Companies should also consider the administrative cost of compliance.


Our thoughts: 

Considering the current guidance, the risks outweigh the benefits. As a company, we’ve made the decision to opt-out. Here are things to consider when making your decision:

For employers: There is no benefit to the employer and an increasing risk based on the size of your workforce.

For employees: If you have the option, think about the timing of the payback – right after the holidays – many people are already strapped for cash and some are looking at a large personal tax bill in April. The benefit to most employees is modest and may cause you more grief later.