Payroll tax holiday for employees—pros and cons for the business owner

In response to the stalemate, on August 8, the president signed four executive actions including the presidential memorandum to allow employees to defer certain payroll tax obligations.

The memorandum directs the Treasury Secretary to use his authority to defer the withholding, deposit and payment of employees’ 6.2% Social Security tax for wages or compensation paid between Sept. 1 and Dec. 31, 2020. Also, the deferral is limited to any employees whose wages or compensation is generally less than $4,000 payable during any biweekly pay period. Finally, the memo directs the Treasury to explore avenues, including legislation, to eliminate the obligation to pay the deferred taxes.

IRS Notice 2020-65 answers some of the questions but leaves many issues open. As of today, we know the following:

  • An employer’s responsibility to withhold and deposit Social Security taxes on wages and compensation paid between Sept. 1 and Dec. 31 is postponed until Jan. 1, 2021.
  • The amount deferred would be withheld and deposited (paid) ratably from wages and compensation paid from Jan. 1, 2021, through April 30, 2021.
  • If necessary (e.g., if an employee leaves before paying back the deferred taxes), an employer “may make arrangements” to otherwise collect the tax.

Considerations and next steps:

  • The deferral is optional to employers.
  • Consider the implementation costs, including reprogramming now and again in January.
  • Consider the implications of employees who may leave before the deferred tax is repaid. For example, how to handle retirements, maternity or paternity leaves, or employees who switch jobs?
  • Consider employee implications.
    • Postponement now will give workers more take-home pay, but starting Jan. 1, the postponed amount comes due. That means the employer would basically double the 6.2% withholding during the payment period. For employees that cease employment, the entire amount likely comes due.
    • The memorandum directs the Treasury Secretary to consider forgiveness of the deferred amount; however, forgiveness is up to Congress.
    • Some employees may be disappointed if an employer opts out. Clear and complete communications with employees should be offered to mitigate this problem.
  • The notice places the responsibility of payment of the deferred amounts on the shoulders of the employer. If the employer does not pay in the deferred amounts by April 30, 2021, they will be subject to interest and penalties, including the onerous “trust fund recovery penalty.” In addition, the “responsible party” rules allow the IRS to collect unpaid taxes from corporate officers, partnership members, employees and other people responsible for collecting and depositing taxes withheld.
  • Each company should make a decision that is best suited to their circumstances after considering conversations with liability carriers.